When it comes to life insurance, finding the right policy to fit your evolving needs can be challenging. Adjustable life insurance, also known as universal life insurance, is one of the many options available to protect your financial future. Whether you’re considering this type of policy for its unique benefits or simply exploring different insurance options, understanding how it works can help you make informed decisions. In this guide, we’ll dive into the key features and advantages of adjustable life insurance so you can determine if it’s right for you.
What Is Adjustable Life Insurance?
Adjustable life insurance is a type of permanent life insurance that offers lifelong protection and the flexibility to adjust your policy’s coverage as needed. Policyholders can modify the premium payments, death benefit amounts, and even the accumulation rate of cash value within the policy. This makes it an attractive option for individuals whose financial needs and goals may change.
How Does an Adjustable Life Insurance Policy Work?
Understanding how adjustable life insurance policies work is key to making the most of their flexible features. We’ve broken down the mechanics of adjustable life insurance to show you how its customizable options can help meet your changing financial needs.
Premium Payments
Unlike many life insurance policies, adjustable life insurance lets policyholders modify their premium payments over time. Depending on the policy’s structure and the accumulated cash value, premiums can be increased, decreased, or even skipped entirely if the cash value is sufficient to cover the cost of the policy. This helps make maintaining lifetime coverage easier and more affordable.
Death Benefit
Policyholders can also adjust their policy’s death benefit amount throughout its life. As your financial needs or family circumstances change, you can increase or decrease the death benefit to reflect your current situation. For example, you may want to increase the death benefit if you take on more financial responsibilities, such as a mortgage or raising children, or decrease it later in life when those obligations are reduced. Keep in mind these adjustments may affect your premiums.
Cash Value
Adjustable life insurance policies build cash value, which grows over time based on the premiums paid and the interest earned. Policyholders can use this cash value as a flexible financial tool by borrowing against it or using it to pay premiums, depending on the policy’s terms. The rate at which the cash value accumulates can also be adjusted by increasing premium payments. However, tapping into the cash value through loans or withdrawals may reduce the policy’s overall death benefit if not repaid, so it’s important to manage this feature carefully.
Pros and Cons of Adjustable Life Insurance
Adjustable life insurance can be a great coverage option, but it’s important to weigh its pros and cons before making a decision.
Benefits of Adjustable Life Insurance
Whether you’re seeking to adapt your policy to meet changing financial needs or want to maximize the cash value component, adjustable life insurance provides a range of features to suit different life stages and goals. Its key benefits include:
- Premium flexibility: Modify your premium payments over time to fit your budget or financial circumstances.
- Adjustable death benefit: Increase or decrease the death benefit based on your changing needs, such as new financial responsibilities or fewer obligations.
- Lifetime coverage: As a permanent policy, it guarantees lifetime protection as long as premiums are paid.
- Cash value growth: Accumulate cash value over time that can be borrowed against or used to cover premium payments, offering an extra layer of financial flexibility.
- Potential tax benefits: The death benefit is generally tax-free to beneficiaries, and the cash value grows tax-deferred.
Drawbacks of Adjustable Life Insurance
While an adjustable life policy offers several advantages, there are also some potential drawbacks to consider before deciding if it’s the right policy for you, including:
- Higher premiums: Adjustable life insurance can have higher premium costs than term life insurance, especially if you increase the death benefit.
- Complexity: The ability to adjust premiums, death benefits, and cash value growth can make managing the policy more complicated.
- Risk of policy lapse: If premiums are reduced too much or cash value is depleted, the policy may lapse, leaving you without coverage.
- Impact on death benefit: Borrowing against the cash value or using it to pay premiums can reduce the overall death benefit if not carefully managed.
- Potential fees: Adjustments to the policy, such as increasing the death benefit or taking out loans, may have additional fees or charges.
Who Should Consider Adjustable Life Insurance?
Individuals who would benefit most from adjustable life insurance are those seeking lifelong coverage with the flexibility to adapt to changing financial needs. This type of policy is ideal for people with evolving life circumstances, such as growing families, career changes, or fluctuating income. For example, a young family may initially need higher coverage to protect against financial risks like a mortgage or children’s education expenses. Over time, as debts decrease or children become financially independent, they can lower their coverage.
Adjustable life insurance is also valuable for individuals experiencing significant shifts in financial circumstances. If income increases, the policyholder can boost premium payments to grow the cash value more rapidly. During times of financial strain, they may reduce premiums or tap into the accumulated cash value to keep the policy active. This adaptability makes adjustable life insurance a practical solution for those who need long-term protection but want the option to modify their policy as their life and financial situation evolves.
Comparing Adjustable Life Insurance with Other Policies
To help you determine whether adjustable life insurance suits your circumstances, we’ve compared it to whole and term life insurance below.
| Adjustable Life Insurance (Universal Life Insurance) | Whole Life Insurance | Term Life Insurance | |
| Coverage Duration | Lifetime, as long as premiums are paid | Lifetime, as long as premiums are paid | Set term, usually 10, 20, or 30 years |
| Premium Flexibility | Can be increased or decreased | Fixed | Fixed |
| Death Benefit | Offers various subaccounts for investment | High (market-dependent) | Adjustable but affected by market performance |
| Grows at a fixed rate set by the insurer | None | Low | Guaranteed death benefit |
Is Adjustable Life Insurance Right for You?
Adjustable life insurance is a versatile option that offers lifetime coverage and the ability to modify premiums, death benefits, and cash value over time. Universal policies are a good fit for individuals whose financial needs are likely to change, such as those with growing families, fluctuating incomes, or long-term financial goals. If you need help finding a life insurance policy that fits your unique needs, contact AmFi today!
Adjustable Life Insurance FAQs
Is there a difference between universal and adjustable life insurance?
There is no difference between universal and adjustable life insurance. These terms are used interchangeably to describe the same type of flexible life insurance policy.
How does adjustable life insurance compare to term life insurance?
Adjustable life insurance provides lifetime coverage with flexible premiums, cash value accumulation, and an adjustable death benefit. In contrast, term life insurance offers straightforward, low-cost coverage for a set period without the flexibility or cash value component. While adjustable life insurance suits those seeking long-term financial planning with flexibility, term life insurance is ideal for those looking for simple, affordable protection for a specific time frame.
What type of life insurance incorporates flexible premiums?
Adjustable life insurance, also known as universal life insurance, incorporates flexible premiums that can be increased or decreased as necessary. Other life insurance policies, like whole and term life, have fixed premiums.
Can I change the coverage amount of my adjustable life insurance policy?
Yes, adjustable life insurance allows you to change the coverage amount over time. You can increase or decrease the death benefit based on your changing financial needs, though increasing coverage may require additional underwriting. Keep in mind that adjusting the coverage can also affect your premium payments.
What is the average value of adjustable life insurance?
The average value of an adjustable life insurance policy varies widely based on the policyholder’s age, health, and the desired death benefit. Typically, coverage amounts range from $100,000 to over $1 million. Premiums and cash value growth will also influence the overall value of the policy over time.
How does the cash value component of adjustable life insurance work?
The cash value component of adjustable life insurance grows over time based on the premiums you pay and the interest earned. You can access this cash value through loans or withdrawals and use it at your discretion. However, borrowing against it may reduce the death benefit if not repaid.
Are there any risks associated with adjustable life insurance?
Yes, there are risks associated with adjustable life insurance. If you reduce premium payments too much or withdraw too much from the cash value, the policy could lapse, leaving you without coverage. Additionally, increases in the death benefit may lead to higher premiums.
