Manage Your Changing Needs With Adjustable Life Insurance

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  • Adjustable life insurance plans let policyholders manage changing financial and personal needs. Learn the ins and outs of this permanent insurance option.

Adjustable life insurance provides flexibility to policyholders, letting them modify aspects of a preexisting plan to accommodate their current or anticipated needs. Learn what you can alter in an adjustable life policy, and explore why this option may be ideal if you're anticipating changes to your financial situation or life goals.

Adjustable Life Insurance Defined

Adjustable life insurance plans are permanent policies that contain features of both whole and term insurance. They’re designed to give policyholders the flexibility to adjust key policy features, including:

  • The plan’s face amount
  • The period of protection
  • Premium payment amounts
  • Premium payment periods

In addition to a death benefit, this type of plan often contains a cash value subaccount, which is an interest-bearing savings component that’s funded by a percentage of the premium payments. Once the cash value account reaches a certain amount, it may be withdrawn or used as collateral for a loan. This component is often used as a tool for retirement savings.

What Is Another Name for Adjustable Life Insurance?

Depending on the insurance company or financial advisor you’re working with, adjustable life insurance may be referred to by several different names, including:

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

Although these policies may offer slightly different benefits, they all refer to life insurance policies that feature adjustable components.

How Adjustable Life Insurance Works

When you buy adjustable life insurance, your signed contract should contain the terms of the policy, including what features may be modified, how often they may be altered and the process for making changes. Permitted modifications often include:

  • Adjustments to premium payment amounts
  • Adjustments to the policy’s death benefit or face value
  • Adjustments to the premium payment period
  • Adjustments to the guaranteed protection period

For many companies, change requests must be made in writing, often with advance notice, and significant modifications, such as increases to the plan’s face value, may require additional actions. Policyholders may need to undergo further underwriting steps or provide evidence of insurability. Depending on the policy, other limitations may apply.

As long as you've paid your premiums, adjustable life insurance offers financial protection over your full lifetime. When you die, your named beneficiaries receive the contracted death benefit payout.

Can You Add Riders to Adjustable Life Insurance?

At the time of purchase, you may opt to add riders to your adjustable life insurance policy. These optional add-ons can provide enhanced benefits to your plan, including:

  • Coverage for long-term care needs
  • Coverage for critical illnesses
  • Accelerated death benefits
  • Spousal and other family coverage
  • Coverage for policyholders who have high-risk jobs or hobbies

However, riders may be costly, and any potential benefits should be weighed against the amount they'll add to your premiums.

The Advantages of Adjustable Life Insurance

Adjustable life insurance offers one main advantage over traditional life insurance plans: customization. Most traditional life insurance plans can’t be modified, so if you need to adjust your coverage, you’ll have to cancel your existing policy and purchase a new plan. That can be accompanied by risks associated with the underwriting process such as higher premiums and possible denial of coverage. When you have adjustable life insurance, you can simply modify your existing policy to suit your current needs and goals.

This can be especially advantageous for policyholders experiencing or anticipating life changes, such as marriage, pregnancy or grown children leaving home, which may cause them to reevaluate their life insurance needs. It may also benefit individuals who’ve experienced a reduction in income by letting them lower their premiums without losing their coverage. Some adjustable life plans may even permit policyholders to temporarily set the premiums to zero without risking a policy lapse.

In addition, most adjustable life insurance policies guarantee a minimum interest rate, which makes them less risky than variable policies and other plans that don’t offer a similar guarantee.  

Can You Cash Out an Adjustable Life Insurance Policy?

When you surrender an adjustable life insurance policy, you’re essentially forfeiting the death benefit and receiving the accumulated cash value in return. However, the money is subject to a taxable gain.

Alternatively, if the cash value component of your policy has accrued enough money, you may be able to withdraw it without surrendering your entire plan. Plus, if you need money to satisfy a short-term obligation, you may also be able to borrow against the cash value of your policy and pay it back later.

Other Considerations When Modifying Adjustable Life Insurance

Modifying the terms of your life insurance plan can be helpful when your financial needs shift, but the changes you make to your policy can affect it in significant ways, such as altering the cash value schedule or changing the guaranteed interest rate period. In some cases, changes to a policy may cause the cash value to drop too low, which can hinder your ability to withdraw or borrow against your plan.

You should also make sure you understand your policy’s contractual guidelines before making changes because some insurers require modifications to be made within specific timeframes or adhere to other guidelines. Additionally, any changes to the structure of your premiums must follow Internal Revenue Code (IRC) Section 7702, which sets federal guidelines for life insurance policy premiums.

Can You Benefit From Adjustable Life Insurance?

Because adjustable policies with a cash value component can be costly, they aren’t ideal for everyone. However, the flexibility built into this type of policy may be appealing to consumers looking for the ability to customize. That may include individuals who anticipate changes in their earnings or family situations that may impact their life insurance needs. A financial advisor or trained life insurance professional can help you assess your unique needs to determine if an adjustable life insurance policy is the right choice for you.

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