What Is Adjustable Life Insurance: Definition, Pros & Cons

Finding the right life insurance can be daunting, especially when your financial situation is constantly changing. Standard policies often lack the flexibility you need, leaving you stuck with outdated coverage.

This is what adjustable life insurance is for, it allows policyholders to modify the policy’s coverage, premiums, and payment period to suit better their changing financial needs. It combines term and whole life insurance features, offering flexibility and lifelong coverage.

Learn more about adjustable life insurance in the sections that follow to understand how it can work for you.

What Is Adjustable Life Insurance?

The definition of adjustable life insurance is a type of permanent life insurance policy that offers the policyholder flexibility in terms of the premiums, death benefits, and the amount of coverage.

It combines features of term life insurance and whole life insurance, allowing the policyholder to adjust the terms of the policy as their financial needs and circumstances change.

Key characteristics include:

• Flexible coverage
• Adjustable premiums
• Variable payment terms
• Adaptable to changing financial needs
• Provides financial security for beneficiaries

Adjustable life insurance benefits the living by providing a death benefit to designated beneficiaries, ensuring financial security. Additionally, if coordinated with a will, it can help fulfill the policy owner’s broader estate planning goals, such as paying off debts, covering funeral costs, and allocating funds for specific purposes like education or retirement. 

Things You Can Adjust in Adjustable Life Insurance

Adjustable life insurance policies provide flexibility. They allow policyholders to tailor various aspects of their coverage to meet their changing financial circumstances.

 Key features include:

• Adjustable premiums — Adjustable life insurance offers flexible premiums. Policyholders can change the amount and frequency of their premium payments within certain limits.
• Adjustable death benefit — The death benefit can be increased or decreased, although increasing it may require additional underwriting.
• Adjustable coverage — The amount of insurance coverage can be adjusted to better fit the policyholder’s needs over time.
• Cash value component — Like whole life insurance, adjustable life insurance policies often have a cash value component that grows over time and can be borrowed against or withdrawn.

The Differences Between Whole, Term, and Adjustable Life Policies

Understanding the differences between whole, term, and adjustable life insurance policies is essential for selecting the right coverage for you.

• Whole life Insurance — This type provides lifelong coverage with a fixed premium and a guaranteed death benefit. Modified whole life insurance offers a lower initial premium for a specified period, typically 5-10 years. After this initial period, the premium increases to a level that remains fixed for the rest of the policy’s life. Both versions include a cash value component that grows over time, which can be borrowed against or withdrawn.
• Term life Insurance — With coverage for a specific period (e.g., 10, 20, or 30 years), term policies are usually more affordable but do not accumulate cash value. The death benefit is only paid if the insured passes away within the term.
• Adjustable life Insurance — Also known as adjustable whole life or flex life insurance, this type combines elements of both term and whole life policies. It allows policyholders to adjust the premium payments, death benefit, and coverage amount to suit their changing needs. It also includes a cash value component similar to whole life insurance.

How Does an Adjustable Life Insurance Policy’s Cash Value Work?

In an adjustable life insurance policy, the cash value serves as a key component, a unique blend of insurance and investment.

• Premium payments — Part of the premium goes towards the cost of insurance, and the rest goes into a cash value account.
• Cash value accumulation — The cash value grows over time, based on the policy’s interest crediting rate and any dividends.
• Interest crediting — The cash value earns interest, typically at a rate guaranteed by the insurance company.
• Loans — Policyholders can borrow against the cash value at a relatively low interest rate.
• Withdrawals — Policyholders can also withdraw cash from the policy, though this may reduce the death benefit.
• Policy management — Policyholders can adjust their premium payments, death benefit, and coverage amount as needed, providing flexibility in managing the policy.

With all that being said, any life insurance policy isn’t without restrictions and downsides.

Pros and Cons of Adjustable Life Insurance

There are several advantages and disadvantages of adjustable life insurance.

It provides flexibility in premium payments, death benefits, and coverage amounts. However, this flexibility can come with higher costs and complexity compared to traditional life insurance policies.

Pros

In adjustable life insurance, policy owners may change policy some features:

• Flexibility in premium payments — This type of life insurance incorporates flexible premiums, where policyholders can adjust the amount and frequency of premium payments within certain limits, providing adaptability to changing financial circumstances.
• Death benefit options — Adjustable life insurance policies come with a range of death benefit options to choose from. Level, increasing, or decreasing benefits allow policyholders to tailor the policy to meet their specific needs and circumstances. For example, a policyholder may choose an increasing death benefit to keep pace with inflation or a decreasing benefit to align with a declining mortgage balance.
• Cash value growth — One of the key features of adjustable life insurance is the cash value component, which grows over time. This growth is based on a guaranteed minimum interest rate set by the insurance company, ensuring that the cash value continues to accumulate throughout. Additionally, some policies may also earn dividends, further increasing the cash value and providing a source of savings.
• Policy loans and withdrawals — Policyholders have the option to borrow against the cash value of their adjustable life insurance policy or make withdrawals. These loans typically carry relatively low interest rates compared to other forms of borrowing, providing a flexible source of funds. However, it’s important to note that any outstanding loans will reduce the policy’s death benefit and cash value
• Flexible death benefit amount — Another advantage of adjustable life insurance is the ability to adjust the death benefit amount. This flexibility allows policyholders to increase or decrease their coverage as their needs change. For example, policyholders may choose to increase their coverage after major life events such as marriage or the birth of a child, or decrease it if their financial obligations decrease.

Cons

Because of their flexibility, adjustable life insurance plans also present a few problems:

• Cost — The flexibility and cash value component of adjustable life insurance often make it more expensive than term life insurance. Premiums can be higher, especially in the early years of the policy.
• Complexity — Managing an adjustable life insurance policy can be complex. Policyholders need to understand how changes to premiums, death benefits, and cash value affect the policy’s overall performance.
• Potential premium Increases — While adjustable policies offer flexibility, there’s a risk of premium increases, especially if the policyholder decides to increase coverage or the cost of insurance rises.
• Interest rate risk — The cash value component of an adjustable life insurance policy is often tied to the performance of the insurer’s investments. If interest rates drop, the policy’s cash value growth may be affected.
• Opportunity cost — The cash value in an adjustable life insurance policy may not grow as quickly as in other investment options. Policyholders may miss out on higher returns by relying solely on the policy’s cash value growth.
• Market volatility — While long-term investments generally pay off, there’s no guarantee in the case of adjustable life insurance. Fluctuations in the market can affect the policy’s cash value and overall performance.

Understanding these potential drawbacks of a type of policy that can be changed, helps policyholders make informed decisions about whether an adjustable life policy can match their financial circumstances.

Is Adjustable Life Insurance Right for You?

Adjustable life insurance can be a good fit for those who anticipate changes in their financial situation and want control over their premiums. The policy’s cash value feature provides a savings component that can be appealing.

Additionally, adjustable life insurance can be beneficial for parents of children with special needs, as it has flexible premiums and coverage, and can provide financial assistance over the long term.

However, it’s important to note that adjustable life insurance typically requires higher premiums compared to term or fixed whole life insurance. This could limit your ability to invest your money in other, potentially more lucrative endeavors.

Carefully consider your financial goals and needs as understanding adjustable life insurance options is important to find the best solution for you. Compare the costs and benefits of adjustable life insurance with other insurance and investment options.

Conclusion

Choosing adjustable life insurance can be invaluable in today’s unstable economy. With the ability to adjust premiums, death benefits, and coverage amounts, the characteristics of an adjustable life policy give greater control over financial future and planning.

When choosing an adjustable life insurance policy, consider your long-term financial goals, risk tolerance, and the level of flexibility you require. Consulting with a financial advisor can also help you select the right policy to meet your needs.