Adjustable life insurance is a hybrid policy that combines features of term and whole life insurance. An adjustable life policy is a form of permanent insurance, which is designed to last your entire life, as long as the premiums in the plan are paid.
Also known as flexible adjustable premium life insurance, the policy has a cash value component that grows with the financial performance of the insurer but has a guaranteed minimum interest rate. Adjustable policies have pros and cons, but they can be a good alternative to permanent life insurance if you want more flexibility should your financial needs change.
how does adjustable life insurance work?
Adjustable life insurance or universal life insurance works like other life insurance products, but has the added benefit of flexibility, depending on your financial situation. the policy has a death benefit that is paid tax-free to a beneficiary if the insured dies, and premiums are paid monthly or annually.
Because adjustable life insurance is a form of permanent insurance, part of the premiums goes toward the cost of insurance (such as administrative fees and death benefit coverage), while the other part goes toward the cost of insurance. cash value. As this cash value grows, it can be used in a variety of ways. for example, it can be used to obtain a loan or pay premiums.
adjustable life insurance offers cash value and flexible premiums
Adjustable life insurance has a cash value component separate from the death benefit. If you put more money into the policy than is required, the cash value will increase more quickly. You can also use the cash value of the adjustable life insurance policy to pay some or all of your premiums, making your payments flexible over time.
For example, if you experience a financial hardship, such as the death of a family member, you could pay the minimum premium set by the insurer for a period and then resume typical payments once the hardship is over. on the other hand, many people choose to pay the maximum premium during the first few years of the policy so that the cash value can grow faster.
The cash value of a flexible adjustable premium life insurance policy grows based on the interest rate on your insurer’s financial portfolio. As mentioned above, there is a minimum annual interest rate that is guaranteed to increase your cash value. But if the insurer has a positive market performance, then your cash value will grow at a higher interest rate. The cash value of an adjustable life insurance policy can be used as:
adjustable life with indexed account option
Adjustable life insurance with an index option is similar to a standard adjustable life policy, but the growth in cash value is tied to the financial performance of an index. the interest rate will rise or fall if the index you have chosen performs well or poorly over a period.
An index account is similar to variable life insurance in that you can choose to invest the cash value in different sub-accounts. each insurer chooses its own indices, but common options include the nasdaq-100 and the russell 2000. in general, index life insurance has a higher potential return than whole life insurance, but also carries the risk of higher growth. slow if the underlying index performs poorly.
what is a 7702 plan?
Permanent life policies that have a cash value component, such as flexible adjustable premium policies, are often referred to as 7702 life insurance. This designation simply means that they comply with section 7702 of the insurance tax rules of life. Life insurance has many tax advantages, including a tax-free distribution of death benefits. The tax regulation created a limit to what could be classified as a life insurance product so that other investment vehicles could not take advantage of the tax benefits of life insurance.
can the death benefit be changed on an adjustable life policy?
Adjustable life insurance allows you to decrease or increase your death benefit as your coverage requirements change. if the increase is large enough, you may have to undergo additional medical examination and pay higher premiums. In the event of a decline, you may be able to pay lower premiums or have no premium at all if your cash value has increased enough to pay for the policy.
For example, say that all of your children are self-sufficient and no longer dependent on you. At that point, you may not need a large death benefit. You could lower the face amount with an adjustable life insurance policy to precisely cover your needs and reduce ongoing payments.
what makes adjustable life insurance different from other types of life insurance?
Adjustable life insurance differs from other life insurance policies in that it can be customized to your individual needs and can change with your financial requirements. Below, we compare adjustable life insurance to other popular insurance products.
adjustable life insurance vs. whole life insurance
Whole life insurance differs from adjustable life insurance in that it offers less flexibility. Whole life has a guaranteed fixed interest rate at which the cash value of the policy grows. this means that even if the insurer’s portfolio is doing well, you will only get the fixed interest rate.
Compared to an adjustable life policy, which has an interest rate that can increase when the insurer performs well, you may lose out on potential earnings with a whole life policy. on the other hand, when the insurer performs poorly, the interest rate on an adjustable life policy could be less than the guaranteed rate offered by whole life insurance.
Whole life insurance can be beneficial if you want a simpler product with slightly cheaper rates. whole life policies have constant premiums that are guaranteed to stay at the same level. This can be reassuring for people who want to buy life insurance but don’t want to worry about policy costs changing later in life.
adjustable life insurance vs. variable life insurance
Variable life insurance and adjustable life insurance are forms of permanent insurance, but the main difference is how the cash value grows. As mentioned above, adjustable life policies have a minimum interest rate, but their cash value can increase more quickly depending on the financial performance of the insurer. For variable life, your interest rate depends on the investment categories you’ve selected from a list offered by your insurer. this may include investment categories tied to stocks, bonds, treasury bills, and other investment securities.
Since you are selecting the cash value growth mode, there is typically no guaranteed minimum interest rate. therefore, variable life insurance may have an interest rate close to zero and significantly lower than that of an adjustable life policy. That’s how variable life insurance is a more “risky” investment product compared to more stable policies like whole and adjustable life insurance.
what are the advantages and disadvantages of adjustable life insurance?
Flexible adjustable premium life insurance can be attractive if you know you may have changing coverage needs in the future. The ability to adjust policy components based on your financial situation or future goals can be helpful in an insurance policy. For example, if you expect to have a child, you may find that you need more insurance. In this case, if you had adjustable life insurance, you could easily increase the premiums and face value of the policy to offset the additional need.
Adjustable premium life insurance is also attractive if you want to be able to adjust premiums based on your financial situation. For example, if you earn a lot now and want to minimize costs in retirement, you can overfund an adjustable policy for the first few years of coverage and use its cash value to pay premiums later.
However, flexible premium policies and other permanent insurance policies can be expensive, since cash value insurance carries a higher premium. this is an important factor to consider when deciding what type of life insurance to buy.