Adjustable Life Insurance Explained: What You Need to Know

When considering future planning and building a strong financial future for your family, getting an insurance policy is essential for most people. It's also one of the least appealing parts of financial planning, as you'll have to plan for your mortality. But with the right coverage, you know that whatever happens in life, your family is protected. 

Adjustable life insurance is a type of whole life insurance that allows you to adjust the policy amount — and the payments — throughout your lifetime. Below you'll find an overview of the pros and cons to help you decide whether adjustable life insurance is the right fit for your family. 

What is Adjustable Life Insurance?

Adjustable life insurance is a type of permanent life insurance, sometimes called universal life insurance or flexible premium life insurance. It became popular as universal life insurance in the 1980s and 1990s but is now usually marketed as adjustable. Key features include:

• Lasts the policyholder's lifetime from when they take out the policy 
• Can just adjust premiums over your lifetime according to policy specifications
• Adjust the death benefit to pay more or less in premiums
• You'll get a cash-out value that can accumulate interest
• You can adjust cash value or use cash value to pay premiums 

Adjustable life insurance gives you the flexibility to adjust your insurance based on shifting life events, from greater savings to changes in the family, such as the birth of a child. What is covered by life insurance may vary by insurer, but adjustable life insurance usually has a stated death benefit linked to the premiums.

A unique feature common in whole life insurance is that this type of insurance includes a savings component, known as cash value, that grows over time. You may borrow from the cash value or use it to pay premiums. While the cash value account earns interest, this is typically modest and not comparable to other investment accounts. As long as you pay the premiums, you maintain the cash-out value. 

Adjustable life insurance isn't exactly like either term or whole life insurance. Unlike term insurance policies, which have terms ranging from five years to 30 years, adjustable life insurance doesn't expire at the end of the term. Instead, this type of policy lasts for the duration of your lifetime. Unlike other types of whole life insurance, where the death benefit and premiums are set, adjustable life insurance allows the holder to adjust the premium and the death benefit over their lifetime. 

How Adjustable Life Insurance Works

Adjustable life insurance works like any other life insurance policy, with a few key differences. You'll purchase an adjustable life policy from an insurance provider. Your premiums are based on your age, health, lifestyle and other risk-determining factors as well as your selected death benefit. 

As long as you pay the monthly premiums, you are assured a death benefit paid to the beneficiary of your choice. In addition, a portion of the policy accumulates over time as cash value. Your insurer invests these funds on your behalf, earning you a small amount of interest. 

Three main components are intertwined and can be adjusted. First, you could reduce the death benefit, reducing insurance premiums. Second, you could use some cash value to pay premiums temporarily while maintaining the death benefit. Third, if you need to reduce premiums, you could use a combination of lowering the death benefit and using some cash value to pay premiums for a time. 

Here's an example of how this could work:

Janice has an adjustable life insurance policy she took out at age 30 after getting married but before having children. The original death benefit was $500,000. She has two children in her 30s, and her family purchased a house with a mortgage. Janice decided to increase the insurance policy death benefit to $1 million to protect her children. 

At age 65, approaching retirement and with grown children, Janice decides to reduce the death benefit to $200,000. With each of these adjustments, the premium changes accordingly. However, at retirement, Janice could choose to maintain the higher death benefit as long as she can continue paying the monthly premiums. See more on term life insurance versus whole life insurance here. 

What Are the Pros and Cons of Adjustable Life Insurance Policy?

Adjustable life insurance has some major benefits, but it doesn't come without a few significant drawbacks. Here's an overview of the pros and cons to help you decide whether this type of insurance is the best option for your family. 

Pros

• Offers the protection of whole life insurance
• Has the flexibility of term life insurance
• Can change premiums 
• Can decrease or increase your death benefit
• As long as you pay premiums, you'll get lifelong coverage
• Allows you to account for changes in your financial situation
• Modest amount of interest earned

Cons

• More expensive than term life insurance
• Interest earnings are small compared to other investments like an indexed fund tracking the S&P 500
• Policies may be more complicated to manage

How Much Does an Adjustable Life Insurance Policy Cost?

The average cost of an adjustable life insurance policy varies widely based on the policyholder's age, health, lifestyle, and coverage amount. With some policies, you can increase cash value faster by paying higher premiums. 

A 20-year term life insurance policy with a $250,000 death benefit for a healthy 40-year-old male is $19 per month or $223 per year. For a female, it is $16 per month or $193 per year. For 50-year-olds, that jumps to $40 monthly for males and $32 for females.

You can expect the initial premiums to be higher than those of a term life insurance policy. Adjustable life insurance usually costs three to 15 times more than term life insurance. That means that a 40-year-old could expect to pay $48 to $285 per month for a policy with a $250,000 death benefit.  

One important caveat: Internal Revenue Code (IRC) Section 7702 defines the characteristics of and guidelines for life insurance policies. You'll have to adjust premiums following these guidelines. If you pay too much or violate this law, you'll lose the tax benefits of an adjustable life insurance policy.

Which Type of Insurance Is Best for Your Family?

Adjustable life insurance policies have pros and cons. It can cost significantly more than term life insurance. However, it can offer security for people with a strong family history of health problems. For others, a term life insurance policy and investing the savings can be a better financial strategy. Whether this type of insurance is the best for you will depend on your health, financial situation and your family's needs.

Frequently Asked Questions