What is adjustable life insurance?

Adjustable life insurance offers what most life insurance policies don’t — flexibility. The caveat? Premium payments can be 6-10 costlier than a binding life insurance policy.

Nupur Gambhir

Nupur Gambhir

Published December 4, 2019

KEY TAKEAWAYS

  • Unlike other life insurance policies, adjustable life insurance allows for changes to the death benefit, the cost and frequency of premiums, and cash value

  • The cash value in an adjustable policy can be used as an additional savings vehicle, though it is less economical than other investment options

  • A term policy is a better life insurance option for most people, but adjustable life insurance can be a good choice for joint-policy holders, parents of children with special needs, and individuals who have maxed out other investment options

One of the many forms of permanent life insurance, adjustable life insurance is another name for universal life insurance and is sometimes also called “flexible premium adjustable life insurance”. Like all permanent life insurance policies, adjustable life insurance lasts your entire life, though it offers flexibility in altering your policy if your circumstances change. Though a term life insurance policy doesn’t offer the same flexibility, it’s usually the recommended policy option because of its lower premium rates. People who select this type of policy usually choose adjustable life insurance over other policy options for its malleability.

In this article:

How adjustable life insurance works

Life insurance is a financial safety net for your family in the event of your death. Adjustable life insurance is a permanent life insurance policy that is in force throughout your life, and you pay monthly or annual life insurance premiums that secure the death benefit your family receives when you die.

Aside from the cost of the insurance policy, part of your premium payments go toward a component available in permanent life insurance policies called the cash value, which grows interest based on a variable rate. Once you’ve accumulated enough cash value, you can use it to pay for your premiums or go toward the death benefit.

What sets adjustable life insurance apart from other life insurance policies is the flexibility it offers in adjusting the premium payments and death benefits should your needs or financial situation change.

The cash value of an adjustable life insurance policy

The cash value in a life insurance policy is a tax-deferred savings component that can earn a small amount of variable interest. Your monthly or annual premium payments go toward the cash value of the policy and can decrease the cost you pay for coverage over time. As it’s accumulating cash value, the premium decreases gradually until eventually, the cash value makes up 100% of the death benefit

The cash value of an adjustable life insurance policy be utilized in multiple ways:

  • Cash withdrawal
  • Retirement savings supplement
  • Loan with interest
  • Policy premium payment

Learn more about how to use your policy’s cash value

Adjustable life insurance benefits

Most people who choose to purchase an adjustable life insurance policy do so because it can be easily changed. If the policyholder needs more accessible cash-flow, he or she can decrease how much is being spent on premium payments or they can withdraw from the cash value of the policy.

There are three key elements you can change in an adjustable life insurance policy:

* Premiums — Adjustable life insurance lets you modify the amount or frequency of premium payments, with a minimum set by the carrier. This is why it’s more commonly known as flexible premium adjustable life insurance.

* Death benefit — You can increase or decrease the face amount of the policy as your needs shift. A large increase may require additional underwriting, a new medical exam, and evidence of insurability, while a decrease may lower your premiums or allow you to stop paying premiums if the cash value of the policy has reached a certain amount.

* 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 set by the insurer. Though there is a minimum interest rate that comes with your policy, if the market does well and the policy performs well, then your cash value grows. 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.

Average adjustable life insurance rates

Rates are for a male with a Preferred (nonsmoker) classification, for $100,000 in coverage and no optional riders.

AGESMONTHLYYEARLY
20$36.19$434.38
30$42.00$504.00
40$62.74$752.93
50$89.50$1,074.09

Who should buy adjustable life insurance?

Because adjustable life insurance is typically more expensive than term life insurance, term policies tend the be the better coverage option for most individuals. People usually opt-in for the costlier premiums associated with an adjustable policy because they need the flexibility to account for unforeseen events in the future, such as a change in health or income.

An adjustable life insurance policy may also be a good choice for spouses who are considering buying a life insurance policy together. Survivorship life insurance policies, which pay out to a beneficiary once both spouses pass away, are typically best suited for an adjustable life insurance policy.

Parents of children with special needs or individuals with a high net-worth may also consider adjustable life insurance as an additional tax-deferred savings vehicle — especially if they have maxed out other types of similar accounts.

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Adjustable life insurance compared to other life insurance policies

An adjustable life insurance policy is one of many policy options to consider when purchasing life insurance coverage — how does it compare to the other types of life insurance policies that are out there?

Most people will find that there are life insurance policies that are better suited for their needs than adjustable life insurance. An adjustable policy’s flexibility in making changes to the policy is also what makes it exponentially more expensive than other coverage options. Many people will find that the premium payments for an adjustable policy are too high to maintain.

Additionally, using the cash value to invest or save money may not be the most cost-effective method for most individuals. The variable interest rate can often mean low returns; most people see a higher rate of return when investing in an IRA, 401k, and even a savings account. An individual purchasing an adjustable life insurance policy for the investment opportunity will likely yield higher dividends by purchasing a term life insurance policy and investing the price difference elsewhere.

Adjustable life insurance vs. term life insurance

Although adjustable life insurance is often seen as a hybrid between whole and term life insurance, adjustable life insurance differs from term policies in a few key ways.

Namely, term life insurance only offers coverage for a set period of time, anywhere from 10-40 years. Term policies also tend to be a bit more straightforward — there is no cash value and the premium payments go solely towards the death benefit. This makes term coverage 6-10 times cheaper than adjustable life insurance.

FEATUREADJUSTABLE LIFETERM LIFE
DurationLifeSet period of time, anywhere from 10-40 years
Death BenefitCan be adjustedRemains the same throughout the term
Guaranteed Cash ValueCan be paid towards death benefitNo cash value
How Cash Grows (or Shrinks)Variable interest rate set by insurerN/A
PremiumsVaries, up to the customer (subject to federal tax laws)Level

Adjustable life insurance vs. whole life insurance

Both adjustable life insurance and whole life insurance are types of permanent life insurance, but adjustable life insurance offers more flexibility than whole life insurance. Because whole life insurance is costly and cannot be modified at any time, 45% of whole life policies are abandoned within the first 10 years of holding the policy.

FEATUREADJUSTABLE LIFEWHOLE LIFE
DurationLifeLife
Death BenefitCan be adjustedRemains the same throughout the term
Guaranteed Cash ValueCan be paid towards death benefitCan only be used while insured is alive
How Cash Grows (or Shrinks)Variable interest rate set by insurer and marketEarns interest at a predetermined fixed rate
PremiumsVaries, up to the customer (subject to federal tax laws)Level

Adjustable life insurance vs. variable life insurance

Adjustable life insurance and variable life insurance are both types of permanent life insurance that offer a cash value, but differ in how the cash value can be invested.

With adjustable life insurance, the cash value is based on a minimum interest rate and the financial performance of your insurer’s portfolio, while variable insurance offers a diverse range of investment options. These can include stocks, bonds, and mutual funds offered by the insurer.

FEATUREUNIVERSAL LIFEVARIABLE LIFE
DurationLifeLife
Guaranteed Death BenefitYes (But you can choose to adjust)Yes
Guaranteed Cash ValueCan be paid towards death benefitNo cash value
How Cash Grows (or Shrinks)Variable interest rate set by insurerSub-accounts (pool of investor funds offered by the insurer)
PremiumsVaries, up to the customer (subject to federal tax laws)Level

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.