What is Adjustable Life Insurance?
Adjustable life insurance is a versatile policy that allows you to modify various features even after you’ve signed up. Changes can be made to the premium payments and death benefit, granting the policyholder substantial control. This type of insurance also includes an interest-earning savings component known as the ‘cash value’ account. This cash value can be accessed while you are still alive, offering an added layer of financial flexibility.
Adjustable life insurance requires more active management compared to other insurance types but offers unmatched adjustability in return. Here’s what you need to know if you’re considering an adjustable life insurance policy.
Key Takeaways
- Adjustable life insurance permits adjustments to the cash value, premiums, and death benefit.
- The policy offers flexibility to evolve insurance coverage based on significant life changes.
- Adjustable life insurance features a savings component called cash value.
- As the cash value accumulates, it can be borrowed against or used to pay premiums.
- Cash value accounts tend to earn modest interest, though returns vary.
Understanding Adjustable Life Insurance
Adjustable life insurance is a form of permanent life insurance, intended to last your entire life as long as premiums are paid. Unlike other types such as whole life insurance, adjustable life insurance permits policy modifications after initiation.
For instance, while whole life policies have consistent monthly premiums, adjustable life insurance allows modifications to the payment amounts each year. You can opt to pay more during financially stable periods and reduce payments during tough times or after a job loss.
As with other permanent life policies, adjustable life insurance includes a cash value savings component that earns interest contingent on market rates, which means returns can fluctuate annually. This cash value can be withdrawn or borrowed against, or saved to offset future premiums.
Due to its flexible nature, adjustable life insurance is a compelling choice for those seeking permanent coverage combined with adaptable features. Be aware that increasing the death benefit might necessitate additional underwriting, including possible medical exams.
Factors That Can Be Adjusted
Three key elements can be tailored within an adjustable life insurance policy: premiums, cash value, and death benefit.
Premiums: You can alter the frequency or amount of your premium payments, provided the minimum cost of the insurance is met.
Cash Value: You can grow the cash value by increasing your premium payments. Conversely, the cash amount might be reduced if funds are withdrawn or used to pay premiums. Constantly tapping into cash value may risk policy lapse, so ensure sufficient funds remain intact.
Death Benefit: You can opt to increase or decrease the death benefit. Significant life events, like the birth of a child, might prompt an increase, which generally results in higher premiums and may require additional medical underwriting. Decreasing the death benefit usually involves a straightforward request process.
Advantages and Disadvantages of Adjustable Life Insurance
Flexible premiums and death benefits make adjustable life insurance highly advantageous, alongside offering lifelong coverage if maintained correctly. However, the policy can be complex and more costly than term life insurance.
Pros:
- Adjustable premiums
- Modifiable death benefit
- Potential lifelong coverage
- Accrues cash value
Cons:
- Higher initial costs
- Modest interest earnings
- Requires active management
Guidelines for Life Insurance Policies and Riders
The Internal Revenue Code (IRC) Section 7702 sets the parameters and characteristics for life insurance policies, ensuring tax benefits for policyholders. Adhering to these guidelines is crucial to maintain these tax advantages.
Policies may include optional riders like a waiver of premium or accidental death and dismemberment riders to enhance coverage.
Adjustable Life Insurance Versus Universal Life Insurance
Adjustable life insurance is synonymous with universal life insurance, both terms referring to the same flexible policy type.
Cash Value Account Explained
The cash value account is an integral part of adjustable life insurance, acting as an interest-bearing savings component. It grows as you pay premiums and earn interest, and can be borrowed against or withdrawn.
Policy Adjustments
Adjustable life insurance permits changes to the death benefit, premiums, and cash value allocations to meet the policyholder’s needs. Increasing the death benefit may require additional underwriting and possibly a medical examination.
Conclusion
Adjustable life insurance offers a degree of flexibility unrivalled by most traditional policies. The ability to adjust premiums, death benefits, and cash value ensures your policy can evolve with your financial situation and life circumstances. Always research thoroughly and choose reputable life insurers to ensure the best experience.
Related Terms: whole life insurance, term life insurance, premium payment, medical underwriting.
References
- Insurance Information Institute. “What are the Different Types of Permanent Life Insurance Policies?”
- Experian. “Why Is Whole Life Insurance More Expensive Than Term Life?”
- Allstate. “What Is Universal Life Insurance?”
- Guardian Life. “Guide to Life Insurance Loans”.
- Assurance. “Adjustable Rate Life Insurance: A Flexible Option for Coverage”.
- Cornell University, Legal Information Institute. “26 U.S. Code § 7702 - Life insurance contract Defined”.
