Adjustable Life Insurance: Everything You Need To Know
Choosing the best kind of life insurance for you and your family can be challenging, especially when you need a little bit of flexibility with your premiums and death benefit. Luckily, there are life policies that suit all kinds of policyholders on the market.
Adjustable life is a unique and flexible type of whole life insurance that can be customized to your needs, but it can be more complicated than its more typical counterparts. In this guide, we’ll outline what adjustable life insurance is, how it works, its advantages and disadvantages, and how it measures up against other types of life insurance.
Read on to find out everything you need to know about this type of life insurance policy!
What Is Adjustable Life Insurance?
An adjustable life policy, also known as a universal life insurance policy, is a more flexible type of whole life insurance. Like term life insurance policies, you can choose how long you’re covered. But unlike term policies, adjustable life insurance policies will never expire as long as premiums are paid.
Furthermore, this permanent life policy gives you the ability to adjust to your financial situation through its many customization options. This includes the policy’s face value, the length of protection, your premiums, and how often you make these premium payments.
Policy adjustments and customizations can be made at any time, as long as the adjustments are deemed reasonable by your insurance provider. That means that you can increase your universal life insurance policy’s face value – say, because of an addition to the family – but only within a set limit.
How It Works
Because an adjustable life insurance policy is a type of permanent life insurance, your flexible premium payments contribute to your policy in two ways.
The first part of each payment goes toward the costs of having adjustable life insurance policies, which include administrative fees and the accumulation of value toward your death benefit.
The other part goes toward building your insurance policy’s cash value. In adjustable life insurance and whole life insurance in general, your cash value acts as a “savings component” that can be used for several things. Policyholders can borrow against their cash value or use it to cover their premiums.
Your policy’s cash value growth may also fluctuate based on your insurer’s financial portfolio’s general performance and/or how well the market is doing. That means if your insurer’s portfolio experiences positive gains, you can expect your cash value to grow at a higher interest rate. On top of this, your cash value grows at a minimum interest rate, which protects you from losses even if the market isn’t doing very well.
Flexible Premium Payments Explained
Universal life insurance plans allow policyholders to pay flexible premium payments. This means that you can contribute more or less than is required. If you end up paying more than your monthly premiums, you have the choice to let it accumulate in your cash value component or complete premium payments in advance.
Conversely, many insurance companies will also allow policyholders to pay less than the regularly required amount. This can be incredibly helpful to families with temporary financial problems. Insurers will typically let policyholders pay the minimum amount needed (i.e. administrative costs) until they can resume their standard monthly payments.
Who Should Buy It
Because adjustable or universal life policies are so flexible, many families and individuals are drawn toward it. But are adjustable life policies suitable for everyone? The short answer is that it really depends on you.
The long answer is that people who think their financial situation is bound to change or fluctuate in the near future should consider buying an adjustable or universal life insurance policy. Other life insurance policies may have lower premiums, but an adjustable life insurance policy is the only type of permanent life insurance that can accommodate changing situations.
Adjustable Life Insurance Pros And Cons
Adjustable life insurance, by nature, can be quite complicated and challenging to manage. Every plan is unique, so we can’t break down the exact advantages and disadvantages of having them.
However, all adjustable policies have a few things in common. Here are some of the most relevant pros and cons that every potential policyholder needs to know:
Like many permanent life insurance policies, adjustable life insurance has a “forced” savings feature in the form of its cash value component. Generally speaking, your adjustable life insurance policy’s cash value will continue to grow as long steadily and consistently as long as no adjustments are made to your premiums. This may be particularly advantageous to policyholders that struggle with saving on their own.
Most people buy life insurance for their peace of mind in the form of a death benefit. And if you wanted to make adjustments to the size of your death benefit, traditional policies would require you to purchase an add-on.
Because of its flexibility, an adjustable policy makes planning for this benefit more accessible than other types of life insurance policies. You have the ability to adjust as needed without purchasing new policy components or getting reassessed for eligibility.
Scales With CPI
A Consumer Price Index (CPI) is a comprehensive measure taken periodically to give government and insurance agencies an idea of general price changes. This is relevant to your adjustable life insurance because insurers increase your policy’s face value based on CPI changes. Furthermore, unlike other life insurance subtypes, you won’t have to go through a rigorous exam or reassessment process to prove that you qualify for your policy’s adjusted face value.
Stable And Tax-Free Cash Value
An adjustable life insurance policy has many provisions in place to secure your cash value. For example, your cash value can accumulate either tax-free or tax-deferred, depending on whether payouts occur after you die or while you’re still alive. And unlike other policies, your cash value component is unaffected by market fluctuations.
Adjustable life insurance policyholders have the freedom to borrow against their cash values at a low net cost. While you’re still required to pay interest on your policy loans, your cash value will still continue to grow at the minimum rate guaranteed by your policy. This makes borrowing against your policy not only less troublesome than a traditional loan but also much cheaper in the long run.
Can Be Volatile
One drawback of buying an adjustable life insurance policy is the possibility of being affected by the broader investment portfolio that it belongs to. For example, if your insurer’s investment portfolio doesn’t do well, the interest on your adjustable life insurance policy’s cash value will be significantly lower.
However, it’s important to note that most investment portfolios containing adjustable life insurance are usually relatively low-risk. The chances of your adjustable life policy being directly affected by them are quite low.
Relatively Costly Premiums
Costs are at the center of every financial decision you make. Your choice of life insurance (universal, whole, term, or other) is no exception.
Many potential policyholders are put off by the costs of having an adjustable life policy since they are usually more expensive than term life insurance. Its price may be unrealistic for many individuals, especially if the policy is taken out later in life and not given enough time for cash value to accumulate.
However, this added cost is attributed to adjustable life insurance’s many perks: a cash value component, an adjustable death benefit, and a flexible premium.
Can Be Complicated
Many policyholders looking for a simple insurance plan may find that adjustable life insurance requires them to be a little too involved for their tastes. Unlike typical whole life insurance, adjustable life insurance involves making many decisions based on your specific financial context. You also have to keep up with a changing interest rate and premium payment as your cash value grows.
Adjustable Life Insurance vs Other Life Insurance Policies
There are many different types of insurance available. A big part of making the right decision for you and your family is understanding how they all measure up against each other. In this section, we compare adjustable life insurance to whole life insurance as well as variable life insurance, highlighting some of the most relevant differences.
Adjustable Life vs Whole Life Insurance
A typical whole life plan differs from an adjustable life policy mainly because of its lack of flexibility. Specifically, permanent life insurance’s cash value grows at a fixed rate, regardless of how well your insurer’s portfolio performs.
So unlike adjustable rate life insurance that may scale with a boom in the market, whole life policy owners may miss out on potential gains. However, this also means that whole life policyholders don’t get negatively impacted by a declining market.
Whole life insurance can be an attractive option for people that want a cheaper, more straightforward insurance product. Its lower overall cost can be attributed to its stable and unchanging premiums. This also means that policyholders will have fewer issues budgeting for permanent life insurance premiums.
Adjustable Life vs Variable Life Insurance
Adjustable life insurance and variable life insurance are both types of permanent life insurance, but they differ in how cash value accumulates over time.
To put things simply, variable life insurance is a whole life plan with an investment component. You can choose from a range of investment opportunities presented by your insurer, which will dictate your interest rate. Potential investments include stocks, bonds, treasury bills, and other similar securities.
But because your cash growth is linked to an investment, your variable life insurance policy doesn’t have a guaranteed minimum interest rate. That means your interest rate can end up being quite high, but there’s also the possibility of a close-to-zero interest rate. Because of this, variable life insurance is considered a “risky” mode of investment. This differs greatly from adjustable life insurance’s guaranteed minimum interest rate and steady growth.
Buying adjustable life insurance is a viable option for many people looking for some flexibility in their policy. Its premiums, face value, and death benefit are all customizable over time without being subject to reassessments and re-qualifying for insurability.
However, navigating all these significant financial decisions can be quite complicated without proper financial counsel. Contact us at Wesley Insurance, LLC to find out how we can help secure you and your family’s future!