Can You Benefit From an Adjustable Life Policy?

In this article...
  • An adjustable life policy lets you adapt your plan to suit your changing financial and personal needs and goals. Learn more about this hybrid insurance option.

An adjustable life policy provides the lifelong protection of a permanent life insurance plan while letting you adapt your policy to your changing financial and personal needs. Although this type of plan isn't ideal for every investor, it can be advantageous to potential policyholders looking for flexibility. Learn more about this hybrid insurance option, including the potential benefits and other considerations.

What Is an Adjustable Life Policy?

An adjustable life policy is a type of permanent insurance that blends aspects of whole and term life plans. These hybrid policies, which are designed to be flexible, let the policyholder modify key policy features such as premium amounts, the overall payment period, the face amount and the period of protection.

In addition to the death benefit, adjustable life insurance typically includes an interest-bearing savings component. This cash value subaccount, which is funded by a portion of your premium payments, accrues over the lifetime of the policy. As its value increases, it may be withdrawn or used as collateral for a life insurance loan.

What Does an Adjustable Life Policy Let the Policyowner Do?

Because adjustable life policies are designed to give policyowners flexibility to accommodate changes to their financial needs, policyholders may adjust certain key features of their policy, as outlined in the plan’s contractual terms. Allowable changes may include:

  • Increasing or decreasing premium payments
  • Increasing or decreasing the policy’s face value or death benefit
  • Extending or shortening the premium payment period
  • Extending or shortening the policy's guaranteed protection period

How Does an Adjustable Life Policy Work?

At the time of purchase, the insurance company sets the terms for any allowable changes to the plan, including when and how frequently you may make adjustments, and any limitations to what changes may be made. If and when a policyholder wishes to adjust the policy, they must follow these terms, which are usually outlined in your policy’s contract.

Requests for changes often require advance notice to the insurance company. They typically must be made in writing and may be subject to additional requirements. For example, increases to the policy’s face value, especially if they’re substantial, may require a policyholder to provide evidence of insurability or undergo additional medical underwriting before the change takes effect. 

Because adjustable life insurance is a type of permanent policy, it offers financial protection as long as you continue to pay your premiums. After you die, your beneficiaries receive a death benefit payout as defined in the contract.

What Is the Advantage of Adjustable Life Insurance?

The main benefit of adjustable life insurance is its flexibility. A policyholder who owns a traditional permanent life insurance policy may have to cancel their existing policy and purchase a brand new plan if their needs change. In doing so, they'll typically have to go through the full medical underwriting process again, which may result in higher premiums or even denial of coverage. When you purchase an adjustable life insurance plan, you can modify your existing policy to suit your changing needs.

For example, if you’ve been laid off and are on a limited budget, you may be able to lower your premiums either temporarily or permanently, preventing the complete loss of your policy. Under some adjustable life plans, you may even be able to set your premiums to zero for a short period of time without risking a policy lapse. On the other hand, if you’re getting married or having children, you may want to increase your policy’s death benefit to provide additional financial security for your growing family.

Are There Other Considerations When Making Adjustments to Flexible Life Insurance?

When you make adjustments to your life insurance policy, you’re changing the structure of your plan, so it's important to consider the implications of any modifications you make. Depending on the specific changes made, you can potentially alter the cash value schedule or the guaranteed period of the interest rate. If alterations cause your cash value to stay too low, you may be unable to withdraw from it or borrow against it if you need money.

When adjusting your premiums, you’ll also need to adhere to Internal Revenue Code Section 7702, which sets strict guidelines for premium payments.

What Is Another Name for Adjustable Life Insurance?

Adjustable life insurance may be referred to by several names, including:

  • Universal life insurance
  • Flexible premium universal life insurance
  • Flexible premium life insurance
  • Flexible life insurance

Who May Benefit From an Adjustable Life Policy?

Adjustable life policies are typically preferred by consumers who want a life insurance plan with built-in flexibility. That may include young investors, who anticipate changing financial needs over the lifetime of the policy, and other individuals who want to be able to modify their plan to suit their current financial and personal needs. Your financial advisor can help you determine if an adjustable life insurance policy is right for your unique situation.

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