What is adjustable life policy?

Adjustable life insurance, also called universal life insurance, is a type of permanent life insurance that allows the policy owner to adjust certain coverage features throughout the life of the policy. It offers more flexibility than other types of life insurance

From adjustable life insurance to universal life insurance

Adjustable life insurance was introduced to give people an option to buy permanent life insurance (i.e., life insurance that lasts their lifetime) with more flexibility. Say, for example, that the policy holder loses their job. With most permanent policies, their fixed premiums could pose a challenge. With an adjustable policy, though, the policy owner can explore options like decreasing the policy’s death benefit to bring the cost of their coverage down.

While these flexible policies were initially exclusively called adjustable life insurance, the industry jargon has changed over the last few decades. Now, most insurers refer to this type of coverage as universal life insurance.

The policy’s adjustable elements

Adjustable/universal life insurance allows the policy holder to make changes in three key areas:

• Premiums. Your adjustable life insurance policy comes with a minimum premium that you can’t drop below. The insurer sets this minimum based on your cost of insurance (COI), which is essentially the cost to manage and administrate your policy. That COI goes up as you get older and your risk level increases.
  • Beyond the COI-influenced minimum, you have the option to pay more as your budget allows. This allows you to build cash value (more on that below). You may also be able to adjust your premium payment schedule as long as it doesn’t cause what you pay to dip below the required minimum, too.
• Death benefit. If your insurance needs change, an adjustable life insurance policy allows you to increase or decrease your policy’s death benefit. A decrease (say, after you finish paying off your mortgage) will cause a decrease in your premiums. Conversely, an increase will increase your premiums. Depending on the size of the increase, you may be required to submit new evidence of insurability (e.g., go in for a new medical exam).
• Cash value. Most permanent life insurance policies take a predetermined portion of your premium payment and direct it to the cash value account within your policy. With an adjustable policy, however, you have more control. If you choose to make premium payments beyond what’s sufficient to cover your COI, you can direct the excess money into your cash value.
  Alternatively, you can decrease the amount of your cash value by applying it toward premium payments or making withdrawals.

Be advised that while you get flexibility with these policy elements, your adjustable life insurance policy doesn’t give you full control. Your insurer will likely have limits in place pertaining to how drastic your changes can be, and there will likely be specific protocols to follow when requesting adjustments.

Adjustable life insurance cash value

Like other permanent life insurance policies, adjustable life insurance comes with a cash value component. This savings account within the policy earns a variable or guaranteed rate of interest (depending on the policy terms) over time. As we mentioned, you can also grow it faster by making larger premium payments.

Then, your adjustable life insurance policy’s cash value can be used to pay your premiums, to make withdrawals, or as collateral for a low-interest loan from your insurer. While this can be an attractive feature, keep an eye on your balance. If you deplete your policy’s cash value to zero, it will cause a policy lapse and you’ll lose your coverage.

Types of adjustable life insurance

Now called universal life insurance, these adjustable policies come in several forms, including:

• Standard universal life insurance. With this type of universal policy, your cash value growth is linked to market interest rates.
  Guaranteed universal life insurance. These policies grow cash value at a slow, fixed rate. The upside is that the policy won’t lapse if the cash value reaches zero.
• Indexed universal life insurance. These universal policies link cash value growth to the performance of a specific market index (e.g., S&P 500, Dow Jones Industrial Average).
• Variable universal life insurance. You choose certain investments and their performance impacts your cash value growth with a variable universal policy.

Ultimately, adjustable (i.e., universal) life insurance gives you flexibility, but — with the exception of guaranteed universal coverage — it requires you to continually monitor your policy to avoid a lapse.

Of all the adult things you do in your life, buying life insurance is one of the most important. With so many different types of life insurance to choose from, though, the process can be both confusing and frustrating. We're here to help you compare adjustable life insurance to other types of life insurance on the market, and to help you decide if it's the best type of policy for you.

What is adjustable life insurance?

What is adjustable life insurance? As the name suggests, adjustable life insurance can be adjusted throughout the life of the policy. Say a policyholder wants $500,000 in death benefits while their children are young, but by the time they're nearing retirement they only need $200,000. An adjustable policy allows them to make changes based on their current situation. It's the flexible premium of adjustable life insurance that sets it apart.

How does adjustable life insurance work?

An adjustable life insurance policy is a "hybrid" between a term life policy and whole life insurance. Term life is a policy that offers a death benefit for a specific number of years -- typically between five and 30. The policyholder makes the payments and the term insurance policy stays in effect until the end of the term.

On the other hand, a whole life policy can last a policyholder's entire life, with no term limit. As long as premiums are paid as agreed, the death benefit remains in effect. Part of each premium goes toward the cost of the policy (including administrative fees), part goes toward the death benefit, and part goes toward building cash value.

Like whole life insurance, adjustable life insurance is a type of permanent life insurance. That means a policyholder can keep coverage in effect their entire life, with no end date. As long as premiums are paid, the policy remains active. And like most other types of permanent life insurance, cash value accrues in an adjustable life policy. This is money the policyholder saves tax-deferred, earning a small amount of variable interest. There is typically a minimum interest rate the money can earn, and while that sounds good, chances are, a better rate can be found elsewhere in the market.

Flexible premiums

When a policyholder adjusts the death benefit, the premium also changes. When they decrease the benefit, the cost of the policy goes down. If they choose to increase the death benefit, the premium rises.

Adjustable life pros and cons

Pros

• The death benefit is not "fixed," but can be changed as the policyholder sees fit.
• Premiums can be adjusted to fit the current needs of the policyholder.
• Cash value accrues tax-deferred and can be borrowed against.

Cons

• The premiums on an adjustable life policy are typically far more expensive than premiums on a term life policy.
• Interest earned on the cash value is impacted by the investment portfolio it is a part of. If the portfolio does not perform well, the cash value could fail to grow or keep up with inflation.

Adjustable life vs. term life insurance

Term life is far less expensive than adjustable life. It does have an "expiration date" though. For example, if a person takes out a 30-year term life policy in 2022, it will expire in 2052. The ideal situation is for someone to purchase a term life policy with the option of converting it into another type of policy later as their situation changes.

Adjustable life vs. whole life insurance

A whole life policy may accrue cash value like an adjustable life policy, but it does not allow a policyholder to adjust their death benefit or premiums.

Adjustable life vs. universal life insurance

Made popular in the 1980s and 1990s, universal life insurance is essentially the same thing as adjustable life insurance. It's a matter of what the company selling the product calls it. A universal life policy also gives the policyholder the flexibility to raise or lower their death benefit (and with it, adjust their premium).

Adjustable life vs. variable life insurance

The big difference between adjustable life and variable life is how the money is invested. As mentioned, the cash value in an adjustable life insurance policy is invested in a portfolio chosen by the insurance company. The cash value in a variable life insurance policy also rises or falls with the market, but is based on the investments chosen by the policyholder from a menu of options. These are typically mutual funds.

Neither of these policy types should be confused with indexed universal life insurance, a type of permanent insurance with cash value that's tied to a stock market index chosen by the insurance company, such as the S&P 500 or the New York Stock Exchange.

Should you buy adjustable life insurance?

No one can answer this question with certainty, because it depends on the situation. Let's say someone has a family history that includes a serious health condition. The person is healthy but is concerned about their ability to acquire insurance in the future. It may make sense for them to buy an adjustable life policy while they're young and healthy and hold onto it throughout life.

For a person without such health concerns, a term life policy with the same death benefit could cost as little as one-sixth of a permanent policy. The policyholder could easily invest the savings, earning more on their money through the years.

The truth is, there's no one-size-fits-all coverage for all customers. The best life insurance companies are those that lay out the options and answer questions until a person hones in on a policy that provides the best fit.