What Is Adjustable Life Insurance?

What Is Adjustable Life Insurance?

Adjustable or universal life insurance is one kind of permanent life insurance, meaning the policy stays in force your whole life if premiums are paid. In addition to paying a death benefit to your beneficiaries at your death, adjustable life insurance builds cash value you can tap while you're alive.

These features are similar to whole life insurance, another type of permanent life insurance. The key difference: Adjustable life insurance offers the flexibility to adjust your premiums and death benefit as your financial needs change. The premiums and death benefit for whole life insurance usually stay the same throughout the policy.

How Does Adjustable Life Insurance Work?

Like term life insurance, adjustable life insurance pays a death benefit to your survivors if you die with your policy in force. However, adjustable life insurance also has some special features.

Cash Value

When you pay your adjustable life insurance premiums, part of the money goes into a cash account. This account typically grows tax-deferred at an interest rate set by the insurance carrier (it's often similar to money market rates). Once your cash value reaches a certain level, you can withdraw the money, borrow against it or use it to pay your insurance premiums.

Keep in mind that withdrawing or borrowing from your cash value account will reduce the policy's death benefit unless you repay the money. If an outstanding loan accrues so much interest that you owe more than your policy's cash value, your insurance coverage will lapse.

When you die, any remaining cash value belongs to the life insurance company, not your heirs.

Learn more >> What Happens to Cash Value in a Life Insurance Policy at Death?

Adjustable Premiums

Unlike whole life insurance, premiums for adjustable life insurance can change over time. If you need to reduce expenses—for example, you lose your job—you can lower your premiums. When you're flush with cash, you can increase your premiums to build cash value faster.

Over time, however, you need to pay enough to keep the policy in force. If your policy's cash value drops too low to cover the cost of the insurance, the insurer could raise your premiums or your policy could lapse.

Adjustable Death Benefit

You can change the death benefit on your adjustable life insurance as your life changes. For instance, you may want to reduce the death benefit once your mortgage is paid off or your children are grown. Lowering the death benefit reduces your premiums too. Increasing the death benefit may also be an option, but it can require a medical exam.

Pros and Cons of Adjustable Life Insurance

Adjustable or universal life insurance has unique benefits, but also some downsides you should understand before buying a policy.

Pros

• Lifelong coverage: No matter your age or health status, adjustable life insurance stays in force as long as you pay the premiums.
• Builds value: As the policy's cash value grows, you can withdraw money, borrow against the cash value without undergoing a credit check or use the cash value to cover the premiums.
• Customizable premiums: You can increase or decrease adjustable life insurance premiums to fit your financial situation.
• Adjustable death benefit: You may be able to increase or decrease the death benefit if your needs change.

Cons

• Expensive: Adjustable life insurance costs significantly more than term life insurance, although typically less than whole life insurance.
• Complicated: Universal life insurance isn't "set it and forget it." It requires more oversight than most other types of life insurance. For instance, if the policy's cash value dwindles to nothing due to withdrawals or poor returns, your policy could lapse.
• Costs may change: The cost of adjustable life insurance typically rises as you get older. Unless your policy's cash value can cover the increase, you might face higher premiums that could be tough to afford.
• Returns aren't guaranteed: Unlike whole life insurance, the rate of interest on an adjustable life policy's cash value isn't guaranteed. Returns can fluctuate with market changes, which could lower your policy's cash value.
• Death benefit isn't guaranteed: Tapping the cash value (without replenishing it) of your adjustable life insurance could decrease the death benefit.
• Possible tax consequences: Any outstanding loans against your adjustable life policy could be taxable if your policy is surrendered or lapses.

Can You Cash Out an Adjustable Life Insurance Policy?

You can borrow against an adjustable life insurance policy or withdraw part of its cash value. However, if your policy's cash value drops to zero, the policy lapses. You can also surrender (voluntarily cancel) your policy and receive its surrender value. The surrender value is your policy's cash value, minus any outstanding loans or premiums and any surrender fees the insurance company charges. Surrender fees can be as high as 35%.

Learn more >> Can I Withdraw Money From My Life Insurance?

Should I Get an Adjustable Life Insurance Policy?

Adjustable life insurance policies aren't for everyone. A financial advisor can help you decide if adjustable life insurance makes sense for you, or if a whole or term life policy is a better fit. Here are some scenarios where you may benefit from adjustable life insurance:

• You can afford the premiums. Failing to pay premiums could cause your policy to lapse, wiping out your beneficiaries' death benefit. Since the cost of adjustable life insurance typically rises as you age, it's important to make sure you can afford to fund the policy.
• Your income is highly variable. When your income fluctuates drastically—for instance, you're a real estate agent, stockbroker or salesperson on commission—managing your money can be challenging. Being able to adjust your premiums when money is tight and pay more when you're making more may be a good fit for your financial needs.
• You don't mind actively managing your life insurance. Some people enjoy monitoring their finances. If you're one of them, keeping an eye on your adjustable life insurance probably won't be a hardship.
• You've fully funded your retirement plans. Returns from a 401(k) or individual retirement account (IRA) are typically higher than returns from an adjustable life insurance policy. If you're already putting the maximum into your retirement accounts, adjustable life insurance might be for you.

Learn more >> What Type of Life Insurance Should I Get?

How to Get an Adjustable Life Insurance Policy

Here's how to buy adjustable life insurance.

1. Figure Out How Much Coverage You Need

You can estimate your life insurance needs by considering:

• Outstanding debt such as a mortgage
• Replacing your income or the unpaid labor you do as a stay-at-home parent
• Future expenses like paying for your child's wedding or college tuition

2. Comparison Shop

Get quotes from several different insurance companies to find adjustable life insurance that fits your needs and budget. Because adjustable life insurance is a complex product, consider enlisting an insurance broker to help you sort through your options. A broker representing multiple insurance carriers can suggest different policies and advise you on how much coverage to buy.

3. Research the Company

You're relying on adjustable life insurance to pay a death benefit decades into the future, so you want to make sure the insurer you choose is financially stable, helpful and responsive. Check ratings of insurers' financial health with credit rating agencies such as AM Best. You can use the complaint index managed by the National Association of Insurance Commissioners (NAIC) to evaluate a company's customer service.

4. Apply for Coverage

Once you've found the right policy, you'll need to submit an application. This typically involves answering questions about your health and family health history, age, weight, occupation, lifestyle, whether you smoke and more. Some insurers also conduct a phone interview to get more information about you. Purchasing life insurance generally requires a medical exam, which can usually be conducted in your home by a health care professional the insurer sends out.

5. Get Approved

It may take a week or two to hear if your application was approved. If so, the insurance company will tell you how much coverage you qualify for and how much your premiums will be. Your coverage starts when you make your first premium payment.

The Bottom Line

You have plenty of options when shopping for life insurance. If you like the idea of lifelong coverage, adjustable life insurance may be something to consider.

Before applying for any type of life insurance, it's a good idea to check your credit score. Insurers in most states can use your credit-based insurance score when setting your life insurance rates. Like your consumer credit score, this score is based on data in your credit report. Improving a low consumer credit score could also boost your credit-based insurance score, which may save you money on adjustable life insurance.