Adjustable life insurance

If you are looking for flexible life insurance that allows you to adjust your premium payments, cash value and death benefit, you may want to consider adjustable life insurance. As the name suggests, this type of policy allows you the flexibility to make adjustments to fit your lifestyle and wallet. An adjustable life policy is one kind of permanent insurance, which means that it is valid throughout your life as long as premiums are paid. Another characteristic of permanent policies is that they have a cash value that may be borrowed against. Bankrate’s insurance editorial team looked closely at adjustable life insurance to help you make a decision on whether a policy is right for your needs.

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Whole life insurance combines life insurance with an investment component.

• Coverage for life
• Tax-deferred savings benefit if premiums are paid
• 3 variations of permanent insurance: whole life, universal life and variable life include investment component

Term life insurance is precisely what the name implies: an insurance policy that is good for a specific term of time.

• Fixed premium over term
• No savings benefits
• Outliving policy or policy cancellation results in no money back

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What is adjustable life insurance?

As the name suggests, adjustable life insurance allows you some flexibility that you would not find with other policy types. You can raise or lower the premium as your circumstances change. Because of this, adjustable life insurance is often referred to as flexible premium adjustable life insurance. Additionally, adjustable life insurance gives you the flexibility to increase or decrease the death benefit with your coverage changes. However, note that adjusting these features can affect the cash value contributions within the policy.

Adjustable life is a type of permanent life insurance, and as such, it continues for as long as you pay the premiums — in most cases, until your death. At that time, your beneficiaries receive a payout known as a death benefit.

Unlike term insurance, there is no end date to adjustable life insurance, and the policy builds up a cash value that represents a portion of your premium that is placed in a separate account by your insurer to earn interest. If you decide you no longer need insurance and surrender your policy, you will receive a portion of that cash value minus administrative fees and any policy loan balance, if applicable.

How does adjustable life insurance work?

When you purchase an adjustable life policy, premiums are determined based on your age, health, lifestyle and other risk-determining factors. By continuously paying into an adjustable life insurance, you are assured a death benefit to be paid to the beneficiary of your choice. In addition, your policy has a cash value account that earns interest based on the current market or the policy’s minimum interest rate, whichever is greater.

Flexible premiums in adjustable life insurance

Adjustable life insurance gives you the option to handle your premium payments and your cash value in a few different ways.

As the cash value component grows, you can choose to put it towards paying your premiums. This can be useful if your employment lapses, as you could use the cash value to sustain payments in the interim. However, if the cash value drops to zero and you cannot pay the premiums, you would have to surrender the policy. You should also keep in mind that borrowing against your cash value reduces the death benefit your beneficiaries would receive if you do not pay it back.

You can also borrow money against your policy using the cash value component as collateral, which some individuals prefer to borrowing money from a bank. Depending on your insurer and circumstances, the interest rate your insurance company gives you may be lower than a bank’s.

Flexible death benefits in adjustable life insurance

With adjustable life insurance, you may change the death benefit amount if necessary. With most types of life insurance, the death benefit is fixed when you purchase the policy and can’t be changed. With adjustable life, if your circumstances change and you wish for more or less of a death benefit, you can alter the amount of your payout. Note, however, that a large increase in your death benefit may result in a change in your premium rate, and you may also need to undergo additional medical exams before the change is approved.

For example, if you’ve recently had a child, you may want to increase your death benefit to offer your family more financial protection if you pass away. If you have paid off your mortgage or other significant debt, you might no longer need the same level of life insurance coverage since you would no longer have to worry about your loved ones covering that debt repayment if you passed away. In that case, you may consider lowering your death benefit level.

Who should consider adjustable life insurance?

Adjustable life insurance is worth considering if you want to be able to make decisions throughout the life of your policy so that it remains the best choice for you, no matter how your financial life changes. For example, if you want a fairly high death benefit when your children are young but have less need for a significant payout after they are grown, an adjustable rate policy allows you to make that change and possibly decrease your premium rate at the same time.

Another type of person who may benefit from adjustable life insurance is someone who is caring for a person with disabilities. You may be looking for a policy that will be in effect throughout your life but with the option to make changes if your situation is altered. In that case, adjustable life insurance can offer you the peace of mind that comes with knowing that your loved one will be financially covered if you are not there to care for them.

If you are a high-wealth individual, adjustable life insurance can be part of a comprehensive financial portfolio to diversify your income and provide tax-deferred savings. Your financial advisor can help you determine if this would be a good choice for you.

Pros and cons of adjustable life insurance policies

Adjustable life insurance policies aren’t the right choice for everyone. If you just need a simple, inexpensive policy that features a death benefit for a period of time when it’s most needed, you may be better served with a term policy. If you’re looking for more out of your life insurance, some of the options that come with adjustable life insurance may be beneficial.

The main benefit of adjustable rate policies is flexibility, which makes it easier to negotiate a changing financial landscape while ensuring that your loved ones are provided for in the event of your death. Although they are more expensive than term policies, this may be offset by their additional features.

Pros

• Allow you to account for changes in your financial situation
• Can increase or decrease the death benefit as your circumstances change
• Cash value accumulates over time; can be borrowed from and used to make premium payments
• Continued benefits throughout the life of the policyholder, as long as premiums are paid

Cons

• Generally more expensive than term insurance
• Modest amount of interest earned: higher rates of return can be found by investing elsewhere

Comparing term, whole and adjustable life insurance

Life insurance can be complicated, and it can be challenging to determine the best option for your needs. Three of the most common types of policy are term, whole and adjustable life. We’ve already discussed adjustable life insurance, but it may be helpful to understand what the other types offer as well.

Term life insurance is the simplest type of policy you can purchase. It is generally inexpensive, and it lasts for a certain number of years, as the name suggests. Most insurers offer term insurance for periods between 10 and 30 years, making it a good choice for individuals who just need coverage for a shorter period of time. Unlike permanent insurance types, term policies do not have a cash value that accrues throughout the life of the policy. The only financial gain is the death benefit.

Whole life insurance is the most common type of permanent life insurance. As a permanent policy, it lasts until the policyholder’s death, as long as premiums are paid, and it includes a cash value that builds up over the life of the policy. Whole life insurance may have living benefits built-in or offered as riders, such as long-term care benefits or a disability waiver. While a whole life insurance policy has a fixed premium that you’ll pay for the rest of your life, an adjustable policy lets you alter your premium and death benefit. With whole life, returns on your cash value account are fixed, whereas with adjustable life, returns are influenced by current market rates.

Frequently asked questions

• • What is the best life insurance company?

    The best life insurance company varies for everyone, depending on their policy needs, budget and preferences. To find the best life insurance company for you, it may be helpful to speak with an insurance agent who can point you to providers with the right type of policy options for you. From there, you may want to compare life insurance quotes from the best life insurance companies.

  • Is adjustable life insurance the same thing as universal life insurance?

    Yes, adjustable life insurance is another name for universal life insurance. Adjustable life insurance and universal life insurance allow you to use your cash value to pay premiums, and both feature cash value components that are invested at rates that are determined by the insurer. Both types also allow you to adjust the death benefit, although increasing it may increase your premium amount due.

  • Is adjustable life insurance the cheapest type of insurance I can buy?

    No. Term life insurance will almost always be the most inexpensive type of life insurance policy you can buy. Term and permanent are the two major types of life insurance policy, but permanent policies — which are characterized by a cash value component and lack of term limit — are generally five to ten times more expensive as term.

  • What is the average value of an adjustable life insurance policy?

    The value of an adjustable life insurance policy will vary greatly depending on the amount of death benefit, as well as characteristics of the person who purchased the policy — such as age, health, lifestyle, whether they are a smoker and other factors.Adjustable life — as a type of permanent insurance — will always cost more than term insurance, which does not have a cash value and is only viable for a defined period of years. For example, CNN estimates that a term policy for $500,000 would cost an average of $430 a year for a 35-year-old man, while a permanent policy for the same amount would be roughly $4,400 annually.