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What is adjustable life insurance?

How adjustable life insurance works — and who it's for.

Adjustable life insurance — better known by its full name, flexible premium adjustable life insurance or simply universal life insurance — is a type of permanent life insurance, meaning, as long as you pay your premiums, your policy lasts until you die. This type of policy also has a cash value component. Often described as a hybrid of term life insurance and whole life insurance, adjustable life insurance offers a minimum interest rate based on the insurer’s portfolio, plus the flexibility to change the policy if your circumstances change.

The main reason people choose adjustable life insurance over other kinds of life insurance is for flexibility.

Read on to find out:

How adjustable life insurance works

  1. When you purchase your adjustable life insurance policy, you’ll choose a face value sum for the policy. This sum is also the death benefit, which is the tax-free lump-sum paid to your beneficiaries when you die.

  2. You’ll pay monthly or annual premiums to keep the policy active.

  3. Each month, part of your premium goes to the cost of insurance and part of it goes to the cash value of the policy. As the cash value grows, the cost of insurance decreases, until eventually the cash value makes up 100% of the death benefit.

  4. Adjustable life insurance lets you use the cash value to pay for your premiums, so if you need to lower your premium amount or cannot make payments for a while, then the cash value will keep the policy active (it will also decrease).

  5. The cash value earns interest at a rate set by the insurer, based on its own investment portfolio.

  6. Over the course of the policy, you can change the death benefit up or down as your circumstances change.

  7. When you die, your beneficiaries will get the death benefit, plus a small amount of interest (remember, the cash value only grows enough to cover the cost of insurability, and your premiums can decrease as to make up for that).

What’s adjustable in an adjustable life insurance policy

There are three things that you can change in an adjustable life insurance policy:

1. Premiums — Adjustable life insurance lets you increase amount or frequency of premiums (to add to a cash value) or reduce rate or frequency of premiums, or even them altogether, by covering them with the cash value. (This is why it’s more commonly known as flexible premium adjustable life insurance.)

2. Face amount (also known as the death benefit) — Adjustable life insurance lets you decrease or increase the face amount of the policy as your needs change. A large increase may require additional underwriting, including a medical exam, and higher premiums; a decrease may lower your premiums or allow you to stop paying premiums altogether, if the cash value of the policy has reached a certain amount.

3. Cash value —The cash value of your policy is based on the premiums you pay into the account (less the cost of insurance) and an interest rate of the insurer’s portfolio. Though there is a minimum interest rate that comes with your policy, if the market goes well and the policy performs well, then your cash value may grow even more. You can increase the cash value of the policy by increasing your premium payments, and decrease the cash amount by using it to pay premiums or by withdrawing funds as a loan, with interest.

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Why people buy adjustable life insurance policies

People buy life insurance policies in order to protect their families and dependents when they die, and all types of life insurance off that protection.

The reason people buy adjustable life insurance policies in particular because they like the idea of having some flexibility in their policies to account for unforeseen events in the future.

Examples of that flexibility:

  • They can adjust their premium payments (or even stop paying them as long as the cash value can cover them and the cost of insurance) if they encounter hard times
  • They can increase their death benefit if they end up with more dependents or other costs to cover upon their death
  • They can take a loan from the cash benefit, with interest, if they need cash

Adjustable life insurance compared to other insurance types

Sometimes the best way to understand one insurance product is to explore it in relation to other insurance products. Here’s how adjustable life insurance compares to other types of life insurance:

Adjustable life insurance vs. term life insurance

Adjustable life insurance is permanent insurance with a cash value component and the ability to adjust premium and death benefit. Term life insurance is not permanent insurance — it only lasts as long as the term, has no cash value, and has a set death benefit and premiums (some term policies may allow a one-time death benefit adjustment).

Another huge difference: adjustable life insurance policies (and all permanent life insurance policies) can be 10-times as expense as term life policies.

Learn more about term life insurance.

Adjustable life insurance vs. whole life insurance

Adjustable life insurance and whole life insurance are both types of permanent life insurance, but adjustable life insurance offers more flexibility than whole life insurance.

Whole life insurance offers consistent premiums and guaranteed cash value accumulation (via a fixed interest rate). Adjustable life insurance gives the policyholder the option to change the face value (death benefit) and premium (amount you pay per month or year) of the policy. Another difference: the interest rate on adjustable life insurance policies is variable and not fixed.

Learn more about whole life insurance.

Adjustable life insurance vs. universal life insurance

Adjustable life insurance and universal life insurance are two names for the same thing. (A third name is flexible premium adjustable life insurance!)

Adjustable life insurance vs. permanent life insurance

Adjustable life insurance is a type of permanent life insurance, meaning the policy lasts as long as long as you long as you keep it in force by paying premiums, and that it also has a cash value, which can be used to pay premiums or withdrawn as cash.

Learn more about permanent life insurance.

Adjustable life insurance vs. variable life insurance

Adjustable life insurance and variable life insurance (most commonly known as variable universal life) are both types of permanent life insurance, and the difference between the two has to do with how the cash value portion of the policy is invested. Adjustable life insurance has a cash value is based on a minimum interest rate and the financial performance of your insurer’s portfolio’s, while variable insurance offers you several options for investing the cash value portion, including stocks, bonds, and mutual funds offered by the insurer.

Learn more about variable life insurance

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Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.

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