Adjustable Life Insurance

Updated on April 9, 2024
Article byKosha Mehta
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Adjustable Life Insurance?

Adjustable life insurance is a flexible type of life insurance policy that allows policyholders to modify the coverage amount, premium payments, and the length of coverage over time. Its purpose lies in adapting to the changing needs and circumstances of the insured individual.

Adjustable Life Insurance

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It is especially important as life circumstances evolve, ensuring that the policy aligns with changes in financial responsibilities, such as mortgages, education expenses, or retirement planning, thus offering a versatile and personalized approach to life insurance coverage.

Key Takeaways

  • Adjustable Life Insurance allows policyholders to modify coverage amounts, premiums, and policy durations to match changing financial needs, ensuring protection aligns with evolving circumstances.
  • This policy caters to individuals with dynamic financial goals, allowing them to tailor coverage for major life events like mortgages, education expenses, or retirement planning, ensuring the policy remains relevant over time.
  • While offering control, the complexity of adjustments demands active management. It suits those seeking adaptable coverage but requires ongoing attention to maximize its customization potential.

How Does An Adjustable Life Insurance Policy Work?

Adjustable life insurance policy operates by providing policyholders the flexibility to change various aspects of the policy as their needs change over time. These modifications include adjusting the death benefit amount, altering premium payments, and changing the policy’s duration. Policyholders must meet certain criteria and provide evidence of insurability for these adjustments.

This type of policy offers a versatile solution for individuals anticipating fluctuations in their financial obligations and coverage needs. As life circumstances shift, policyholders can make informed decisions to ensure that their insurance coverage remains aligned with their current and future requirements.

Features

Let us look at its features:

  1. Adjustable Death Benefit: Policyholders can modify the death benefit amount to align with their changing financial responsibilities. This allows them to increase coverage during significant life events like buying a home, starting a family, or taking on debt and reduce coverage as these needs decrease over time.
  2. Flexible Premiums: Policyholders can adjust their premium payments within certain limits based on their financial situation. They can pay higher premiums when they have the means or decrease payments for longer periods while maintaining coverage.
  3. Policy Duration Modification: Adjustable life insurance policies often allow policyholders to extend or shorten the coverage term. This feature is particularly useful if circumstances change, such as paying off a mortgage early or wanting to maintain coverage during retirement.
  4. Cash Value Accumulation: Many adjustable policies offer a cash value component that grows over time. This cash value can be accessed through policy loans or withdrawals. It provides a source of funds for various financial needs.
  5. Riders and Options: Policyholders can customize their coverage further by adding riders (additional benefits) or options to the policy. These might include features like disability income riders, accelerated death benefit riders, or premium waiver riders.

Adjustable Factors

The main adjustable factors in an adjustable life insurance policy include most of the features. It depends on the policyholder as to which feature they would like to adjust or change. Like, policyholders may increase or decrease the death benefit amount. It is the money paid out to beneficiaries upon the policyholder’s death. Also, policyholders can adjust the amount and frequency of premium payments. The policy term can be extended or shortened based on changing needs. Policyholders can also potentially adjust the contributions to this cash value component, impacting the growth and accessibility of the accumulated funds.

However, when making significant adjustments to certain factors, such as increasing the death benefit, policyholders might need to provide updated evidence of insurability to ensure that any changes are still within acceptable risk levels.

Examples

Let us have a look at the examples to understand the concept better

Example #1

Let’s consider a hypothetical example involving Mark, a 30-year-old professional. Mark purchases an adjustable life insurance policy to safeguard his family’s financial security. Initially, he opts for a substantial death benefit to cover his mortgage and support his family in case of his untimely demise. He chooses a 30-year term to align with his mortgage duration.

A few years later, Mark’s financial situation evolves. He pays off his mortgage ahead of schedule and starts a family. Mark recognizes the need to allocate funds to his children’s education. He increases the policy’s death benefit, ensuring their educational expenses are payable. Additionally, he extends the policy term to provide ongoing protection for his family’s long-term needs.

Later, as his children become financially independent and Mark accumulates more savings, he revisits the policy. This time, he reduces the death benefit since his family’s financial reliance has lessened, and he aims to minimize premium payments while maintaining a basic coverage level for final expenses.

Example #2

Let’s consider another scenario involving Sarah, a 25-year-old entrepreneur. Sarah started her own business and invested significant debt to fund its growth. She purchases an adjustable life insurance policy with a high death benefit. This ensures that her business obligations will be covered if something happens to her.

As years pass, Sarah’s business becomes successful, and she manages to pay off her debts. She decided to revisit her insurance policy to make adjustments. Recognizing the increased financial stability of her business, she reduces the death benefit of the policy and adjusts her premium payments accordingly. This allows her to continue having coverage while freeing up some funds for other business investments.

How To Get?

To acquire an adjustable life insurance policy, follow these steps:

  1. Research Policy Options: Explore the adjustable life insurance policies various insurance providers offer.
  2. Choose an Insurer: Select a well-regarded insurance company specializing in adjustable life insurance policies that suit one’s preferences.
  3. Engage with a Professional: Seek assistance from an independent agent or directly from the chosen insurance company to navigate the process.
  4. Evaluate Your Needs: Discuss financial goals and any significant life events with the professional. This will help determine the appropriate coverage amount, premium structure, and policy duration.
  5. Complete the Application: Fill out the required application form, providing accurate personal and relevant details. If necessary, undergo a medical assessment based on the policy and circumstances.
  6. Underwriting Assessment: The insurance company will assess the application and any medical evaluations to determine the premium rates based on the level of risk involved.
  7. Customize the Policy: Collaborate with the professional to customize the policy details, including the death benefit, premium payments, and the policy’s duration.
  8. Review and Confirm: Carefully review the policy documents, including terms, conditions, and additional provisions. It is important to confirm one’s understanding before finalizing the agreement.
  9. Initiate Premium Payments: Begin making premium payments as agreed upon in the policy. Keep track of payment deadlines and available methods.
  10. Facilitate Adjustments as Needed: If circumstances change, communicate with the insurance company or a professional to make necessary adjustments to the policy, ensuring it remains aligned with the evolving needs.
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Pros & Cons  

Let us look at the pros and cons of adjustable life insurance:

#1 – Pros

  1. Flexibility: The key advantage of adjustable life insurance is its adaptability. You can modify coverage amounts, premium payments, and policy duration to match changing financial circumstances.
  2. Tailored Coverage: This policy allows one to align their coverage with specific needs like paying off debts, funding education, or ensuring family security during different life stages.
  3. Cost Control: Adjustable life insurance can offer cost control, enabling one to reduce premiums during financially lean periods and increase them when they have more disposable income.

#2 – Cons

  1. Complexity: The flexibility of adjustable life insurance can also lead to complexity. Understanding policy adjustments their implications, and managing them effectively can be challenging.
  2. Proof of Insurability: Making significant adjustments often requires proving insurability again, potentially leading to higher premiums if a person’s health has deteriorated.
  3. Lack of Stability: Constant adjustments could lead to a lack of stable coverage if not managed carefully, potentially leaving one underinsured.

Adjustable Life Insurance vs Whole Life Insurance

Let us look at the differences between adjustable life insurance and whole life insurance:

AspectAdjustable Life InsuranceWhole Life Insurance
PremiumsIt can be adjusted based on changing needs.Generally fixed throughout the policy.
Death BenefitCan be modified to align with changing needs.Fixed and guaranteed for the policy term.
Cash ValueMay accumulate cash value over time.Builds cash value over the life of the policy.
FlexibilityHighly flexible; coverage can be adjusted.Less flexible; coverage remains constant.
AdjustmentsCan change death benefits, premiums, and terms.Typically, no changes to coverage are allowed.
Premium StructurePayments can be increased or decreased.Premiums remain level throughout.
Investment ComponentLimited investment options or none at all.Includes an investment component.

Adjustable Life Insurance vs Universal Life Insurance  

Let us look at the differences between Adjustable Life Insurance and Universal Life Insurance:

AspectAdjustable Life InsuranceUniversal Life Insurance
PremiumsIt can be adjusted based on changing needs.Flexible premium payments with limits.
Death BenefitCan be modified to match evolving needs.Flexible death benefit options.
Cash ValueMay accumulate cash value over time.Builds cash value, potentially higher.
FlexibilityHighly customizable; coverage can change.High flexibility in premium and coverage.
AdjustmentsChange death benefits, premiums, and terms.Adjust coverage, premium, and savings rate.
Premium StructurePayments can be increased or decreased.Payments can vary within certain limits.
Investment ComponentLimited investment options or none at all.Includes an investment component.
Policy DurationCan adjust terms to fit changing needs.Permanent coverage, often to age 100.
Riders and OptionsIt can include riders for added benefits.Options for customization and riders.
Risk ToleranceAppeals to those wanting flexibility.Attracts individuals seeking flexibility.

Frequently Asked Questions (FAQs)

1. Is adjustable life insurance suitable for everyone? 

While adjustable life insurance offers valuable customization, it’s not a one-size-fits-all solution. It suits changing financial commitments, like mortgages, education expenses, or loans. A more straightforward policy is a better fit if the financial situation is stable.

2. What’s the role of the cash value component in adjustable life insurance? 

Some adjustable life insurance policies accumulate cash value over time, similar to other permanent life insurance options. This cash value is accessed through loans or withdrawals. It provides a source of funds in emergencies. However, utilizing the cash value might impact the policy’s death benefit and overall performance, so it’s crucial to carefully consider the consequences before making any withdrawals.

3. Is medical underwriting required for every adjustment I make to my adjustment life insurance policy? 

Adjustments that involve changes to your death benefit or other substantial modifications may require proof of insurability, which often involves a medical evaluation. Smaller changes like adjusting premium payments might not require additional medical underwriting. Always consult your insurance agent to understand the specific requirements for the adjustments you intend to make.

This has been a guide to what is Adjustable Life Insurance. We explain its features, pros, comparison with whole & universal life insurances, and examples. You can learn more about it from the following articles –

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