Life Insurance

Navigating Adjustable Life Insurance: A Comprehensive Guide

Jack Ellis | May 6, 2024
Adjustable Life Insurance

If you’re in the market for life insurance, you may have realized that there are two main options: term and permanent, both of which have different advantages. If you’re leaning toward permanent, but also prefer to have some built-in flexibility in case your needs change, you might want to explore an adjustable life insurance policy.

Learn more about what an adjustable life policy is, how it works, the pros and cons, and how to decide if that type of policy is a good fit for you.

What is adjustable life insurance?

Adjustable life insurance is a type of permanent life insurance policy that offers the protection of traditional whole life insurance but with flexibility. It allows policyholders to adjust and customize their coverage, premium payments, and cash value accumulation over time to adapt to changing financial needs.

What are the advantages of adjustable life insurance?

Choosing an adjustable life policy has a few main benefits.

  • It provides flexibility in case your financial situation changes. One of the primary advantages of an adjustable life policy is its flexibility. Policyholders can adjust the death benefit, premium payments, and cash value accumulation according to their changing financial situation, goals, and needs. This flexibility makes it suitable for individuals with fluctuating income or changing financial priorities.
  • It allows you to customize your policy. Adjustable life insurance policies typically offer a range of options for policyholders to tailor the coverage to their specific requirements. They can choose the initial death benefit amount, adjust it over time, and select various premium payment options to suit their budget and financial goals.
  • It has a cash value accumulation in addition to a death benefit. Like other types of permanent life insurance, adjustable life insurance policies accumulate cash value over time. Policyholders can access this cash value through policy loans or withdrawals, which can provide a source of funds for emergencies, retirement income, or other financial needs. The ability to adjust the cash value accumulation component if you have an adjustable life policy adds another layer of flexibility to the policy.

Flexible premium adjustable life insurance considerations

​​While adjustable life insurance offers flexible premiums and other benefits, there are also some potential downsides to consider:

  • The policies can be complex: An adjustable life policy can be more complex than term life or traditional whole life insurance policies. Understanding all the options and features, such as different premium payment structures and cash value accumulation methods, may require more effort and financial knowledge.
  • They can cost more than other types of policies: Adjustable life insurance policies may have higher premiums compared to term life insurance, especially in the early years of the policy. The added flexibility and features come at a price, so it's essential to consider whether the benefits justify the cost.
  • You may be at a higher risk of lapsing: With the flexibility to adjust premiums and coverage amounts, there's a risk that policyholders may fail to maintain the policy adequately. If premium payments are not kept up or if the cash value is insufficient to cover costs, the policy could lapse, resulting in the loss of coverage and potential loss of accumulated cash value.
  • You may have to pay surrender charges: Adjustable life insurance policies may have surrender charges if the policy is terminated or cash value is accessed within a certain period, typically during the first several years of the policy. These charges can reduce the amount of cash value available to the policyholder if they decide to surrender the policy or make withdrawals.
  • There is a potential for ending up over-insured: The flexibility to adjust coverage amounts may lead to the temptation to over-insure or under-insure yourself. It's essential to regularly review your insurance needs and adjust the policy accordingly so you have adequate coverage without paying for more than you need.

How does an adjustable life insurance policy work?

An adjustable life policy starts off like any other permanent insurance coverage, but there are provisions that allow for changes later on. Let's consider an example to illustrate how an adjustable life insurance policy works. Mrs. T is a 35-year-old married woman with two young children. She wants to ensure financial protection for her family in case something happens to her. However, she also wants a life insurance policy that provides flexibility to adjust coverage and premium payments as her family's financial needs change over time. As a small business owner, she knows that her income may fluctuate over time.

Mrs. T decides to purchase an adjustable life insurance policy with the following features:

  • Initial death benefit: $500,000
  • Initial premium payment: $100 per month
  • Cash value accumulation: The policy includes a cash value component that grows over time based on a fixed interest rate.

Here's how the adjustable life insurance policy works for Sarah:

When Mrs. T purchases the policy, she selects an initial death benefit of $500,000 to provide financial protection for her family. The premium is set at $100 per month, which she can comfortably afford based on her current income and expenses.

As Mrs. T.’s business grows and her income increases, it changes her financial situation and she decides to revisit her life insurance policy. She decides to increase her coverage to better protect her family's financial future. With the adjustable feature of her policy, she can easily request an increase in her death benefit without having to start over with the purchase of a new policy or undergo a medical exam.

Along with increasing her coverage, Mrs. T also adjusts her premium payments to $150 per month, which fits her budget well thanks to her higher income level. This extra payment can accommodate the higher death benefit amount. If she wanted to, she could have chosen to keep her premium the same and use the accumulated cash value in the policy to cover the increased cost of insurance.

As Mrs. T continues to make premium payments, the cash value component of her policy grows over time. She knows that she can access this cash value through policy loans or withdrawals if needed for emergencies, to supplement her family's income during times of financial strain, or to use it for other financial goals.

Mrs. T takes comfort in knowing that her adjustable life insurance policy provides lifetime coverage, meaning the death benefit will be paid out to her beneficiaries whenever she passes away, as long as the policy remains in force and premiums are paid. By utilizing the flexibility of her adjustable life insurance policy, she’s also able to tailor her coverage and premium payments to meet her family's evolving financial needs over time. This flexibility provides valuable financial security and peace of mind for Mrs. T and her loved ones.

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Who is a good candidate for adjustable life insurance?

​​While Mrs. T was a good candidate for an adjustable life policy, it’s not necessarily the right choice for everyone. Here are a few scenarios where it might make sense:

  • If you expect your financial situation to change significantly over time, such as if you have fluctuating income levels as a business owner, freelancer, or have variable compensation structures.
  • If you prioritize long-term financial planning and want a life insurance policy that can adapt to your evolving needs. If you like having the ability to make adjustments to coverage, premium payments, and cash value accumulation, an adjustable policy can work well for you.
  • If you want permanent life insurance, but also some flexibility. Adjustable life insurance is permanent coverage, meaning it provides lifelong protection as long as premiums are paid. Adjustable life insurance policies offer a range of options for customization, allowing policyholders to tailor their coverage, premium payments, and cash value accumulation to their specific needs and circumstances. 
  • If you have an interest in cash value accumulation: Adjustable life insurance policies include a cash value component that grows over time. If you are someone who is interested in building cash value within your life insurance policy, you may find adjustable life insurance to be a good choice.

Ultimately, the suitability of adjustable life insurance depends on an individual's unique financial situation, goals, and preferences. It's essential to carefully evaluate your needs and consult with a financial advisor or insurance professional to determine whether adjustable life insurance is the right choice for you.

​​Can a term life policy be adjustable life insurance?

No, a term life insurance policy cannot be an adjustable life insurance policy because only permanent life insurance is adjustable. Therefore, the main group of people who an adjustable life insurance policy is not good for are those who prefer term life.

Term life insurance provides coverage for a specific period, such as 10, 20, or 30 years, and is typically more affordable. It offers pure death benefit protection without any cash value component. Once the term expires, the coverage ends unless the policyholder chooses to renew it at a higher premium rate. 

If you decide you want the features and flexibility of adjustable life insurance, you would need to purchase a separate adjustable life insurance policy.

Is adjustable life insurance right for you?

Overall, adjustable life insurance can help add flexibility to your finances by allowing you to adapt your coverage and premium payments to changes in your financial situation and goals. It offers a balance of protection and flexibility that can be valuable for individuals and families with evolving financial needs. Consult with a financial advisor or insurance professional who can assess your situation and help you determine the most suitable life insurance option for you.

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