What is an Adjustable Life Insurance?
Adjustable life insurance, also called universal life insurance, is a type of permanent life insurance that allows the policy owner to adjust certain coverage features throughout the life of the policy. It offers more flexibility than other types of life insurance
From adjustable life insurance to universal life insurance
Adjustable life insurance was introduced to give people an option to buy permanent life insurance (i.e., life insurance that lasts their lifetime) with more flexibility. Say, for example, that the policy holder loses their job. With most permanent policies, their fixed premiums could pose a challenge. With an adjustable policy, though, the policy owner can explore options like decreasing the policy’s death benefit to bring the cost of their coverage down.
While these flexible policies were initially exclusively called adjustable life insurance, the industry jargon has changed over the last few decades. Now, most insurers refer to this type of coverage as universal life insurance.
The policy’s adjustable elements
Adjustable/universal life insurance allows the policy holder to make changes in three key areas:
- Premiums. Your adjustable life insurance policy comes with a minimum premium that you can’t drop below. The insurer sets this minimum based on your cost of insurance (COI), which is essentially the cost to manage and administrate your policy. That COI goes up as you get older and your risk level increases.
- Beyond the COI-influenced minimum, you have the option to pay more as your budget allows. This allows you to build cash value (more on that below). You may also be able to adjust your premium payment schedule as long as it doesn’t cause what you pay to dip below the required minimum, too.
- Death benefit. If your insurance needs change, an adjustable life insurance policy allows you to increase or decrease your policy’s death benefit. A decrease (say, after you finish paying off your mortgage) will cause a decrease in your premiums. Conversely, an increase will increase your premiums. Depending on the size of the increase, you may be required to submit new evidence of insurability (e.g., go in for a new medical exam).
- Cash value. Most permanent life insurance policies take a predetermined portion of your premium payment and direct it to the cash value account within your policy. With an adjustable policy, however, you have more control. If you choose to make premium payments beyond what’s sufficient to cover your COI, you can direct the excess money into your cash value.
Alternatively, you can decrease the amount of your cash value by applying it toward premium payments or making withdrawals.
Be advised that while you get flexibility with these policy elements, your adjustable life insurance policy doesn’t give you full control. Your insurer will likely have limits in place pertaining to how drastic your changes can be, and there will likely be specific protocols to follow when requesting adjustments.
Adjustable life insurance cash value
Like other permanent life insurance policies, adjustable life insurance comes with a cash value component. This savings account within the policy earns a variable or guaranteed rate of interest (depending on the policy terms) over time. As we mentioned, you can also grow it faster by making larger premium payments.
Then, your adjustable life insurance policy’s cash value can be used to pay your premiums, to make withdrawals, or as collateral for a low-interest loan from your insurer. While this can be an attractive feature, keep an eye on your balance. If you deplete your policy’s cash value to zero, it will cause a policy lapse and you’ll lose your coverage.
Types of adjustable life insurance
Now called universal life insurance, these adjustable policies come in several forms, including:
- Standard universal life insurance. With this type of universal policy, your cash value growth is linked to market interest rates.
Guaranteed universal life insurance. These policies grow cash value at a slow, fixed rate. The upside is that the policy won’t lapse if the cash value reaches zero.
- Indexed universal life insurance. These universal policies link cash value growth to the performance of a specific market index (e.g., S&P 500, Dow Jones Industrial Average).
- Variable universal life insurance. You choose certain investments and their performance impacts your cash value growth with a variable universal policy.
Ultimately, adjustable (i.e., universal) life insurance gives you flexibility, but — with the exception of guaranteed universal coverage — it requires you to continually monitor your policy to avoid a lapse.