What Is an Adjustable Life Policy?
An adjustable life policy is a hybrid insurance policy that combines the benefits of term life and permanent life insurance. It's designed to allow policyholders a form of permanent insurance with the option to adjust the period of protection, death benefit amount and policy premiums.
Adjustable life policies are also known as flexible premium adjustable life insurance. While adjustable life insurance has a myriad of options, the downside is that premium payments can be significantly costlier than a traditional binding life insurance policy.
Adjustable life insurance policies have a cash value component that's tied to the insurer’s financial performance. Adjustable life insurance policies last your entire life, as long as premiums are paid into the plan — in most cases, until your death. When you die, your beneficiaries receive a tax-free payout. You can also alter your policy at any point if your financial circumstances change.
How Adjustable Life Insurance Works
When you buy and enroll in an adjustable life insurance policy, your premiums are determined based on your age, health and other personal and financial factors. Adjustable life insurance is a component of permanent insurance, where part of your premium goes toward the policy fees and a portion is set aside toward the cash value.
The cash value generally earns a money market rate of interest and is based on your insurer’s financial portfolio. Most adjustable insurance policies promise a minimum annual interest rate that is guaranteed to grow your cash value.
As the cash value of your policy grows, it can be used in a variety of ways. For example, it can be used to pay for your monthly or annual premiums, surrender the account for the cash value or access a loan, as long as there are enough funds in the account to cover this expense.
- Pay Premiums: Once you have built up cash value in the policy, you can use the funds to pay portions or the entire premium required to fund the account. Make sure the cash value does not drop to zero, or the policy could lapse.
- Take a Loan: Policyholders can borrow money from the insurer, using the cash value of the policy as collateral. The loan would be subject to the insurance company’s interest rates, which are typically very low.
- Surrender the Account for Cash: You can cancel your adjustable life insurance policy and surrender the account to the company. In this case, you surrender any death benefits associated with the policy and in return receive the earned cash value.
Another useful feature is the ability to change three components of your adjustable life insurance plan during the lifespan of your policy: the premiums, death benefit and cash value. The insurance company decides when and how often you're allowed to make these flexible adjustments.
The Pros and Cons of Adjustable Life Insurance
If you know your insurance needs or financial goals are going to change in the future — you get a new job, you’re expecting a child, you have college tuition coming up — the adjustable life insurance plan can be a useful tool. You'll have the flexibility to increase your premiums and policy face value to meet your financial goals. However, adjustable life insurance policies are typically more expensive because cash value insurance includes a costlier premium. You will need to factor that into your cost when deciding what life insurance to purchase.