Most life insurance policies lock in coverage details after purchase, limiting changes to premiums or death benefits. Adjustable life insurance (also called universal or flexible premium adjustable life) offers more flexibility. Here’s what to know about these policies and when they may make sense.
Adjustable Life Insurance Defined
Adjustable life insurance, also known as universal life insurance, is a policy that permits you to change coverage details after buying. You can change the premium and the death benefit if you choose.
Adjustable life is a type of permanent life insurance. There's no expiration date. It can last a policyholder's entire life, provided the scheduled premium payments are made.
How Does Adjustable Life Insurance Work?
Adjustable life insurance works much like other types of life insurance at the start. You choose the amount of coverage for your initial death benefit (called the issue amount). Your premium is based on that amount and your underwriting profile, such as age, gender, tobacco use, and health.
What Factors Can Be Adjusted?
Most adjustable life policies allow changes to premiums and, in many cases, the death benefit.
Premiums
- You can pay more in some years and less in others.
- The insurer sets a minimum annual amount needed to cover insurance costs.
- Paying less than the minimum causes the policy to lapse and coverage to end.
As you age, insurance costs increase. If you pay more than the minimum, the excess goes into a cash value reserve, which can help cover future premiums.
Death Benefit
- Many policies allow you to reduce the death benefit, lowering your insurance costs.
- Some policies allow you to increase the death benefit for a higher premium.
- Securing the option to increase coverage later may require higher initial premiums or a rider, such as a guaranteed insurability rider.
Is Underwriting Required for Changes?
- Premium changes: No medical underwriting is required, as premiums are not tied to health status. You simply must pay enough to cover ongoing costs.
- Reducing coverage: No underwriting is required.
- Increasing coverage: Some policies allow limited increases without underwriting (for example, up to $100,000). Larger increases may require a medical exam.
Does Adjustable Life Have Cash Value?
Yes. Adjustable life includes a cash value component you can use during your lifetime. Cash value can be:
- Withdrawn
- Borrowed through a policy loan
- Used to help cover future premiums
Using cash value may reduce the death benefit paid to beneficiaries.
How Cash Value Builds
- Premium payments first cover insurance and administrative costs.
- Any amount paid above the minimum goes into cash value.
- Paying higher premiums can grow cash value faster.
- If you pay less than the insurance cost, the policy uses cash value to cover the shortfall until it runs out.
How Cash Value Grows by Policy Type
| Policy Type | How Growth Works |
|---|---|
| Adjustable (Universal) | Life Earns interest tied to market interest rates, with a guaranteed minimum rate. |
| Indexed Adjustable Life | Growth is linked to a market index (such as the S&P 500), with limits on gains and losses. You may break even in down years. |
| Variable Adjustable Life | Cash value is invested in subaccounts similar to mutual funds. Higher growth potential comes with higher risk, including possible losses that may require higher premiums. |
Pros & Cons of Adjustable Life Insurance
| Feature | Pros | Cons |
|---|---|---|
| Premium Flexibility | Lets you adjust premium payments to better match your budget. | Requires careful budgeting to avoid higher costs later. |
| Death Benefit Changes | Allows coverage increases or decreases as needs change. | Increases may be limited or require new underwriting. |
| Length of Coverage | Provides lifetime coverage if premiums are maintained. | Costs significantly more than term life insurance. |
| Cash Value Access | Builds cash value you can use while alive. | Cash value growth may be unpredictable. |
| Overall Cost | Often less expensive than other permanent life options. | Can cost six to 10 times more than term life. |
| Policy Management | Offers flexibility in how the policy is funded. | Takes more effort to manage over time. |
Steps to Adjust Your Policy
If you own a universal life insurance policy, your insurer will have a specific process for making changes. Most adjustments follow these general steps:
1. Review Your Adjustable Coverage Rules
Start by reviewing your original policy contract to confirm what changes are allowed to the death benefit. Your monthly policy statements typically show the minimum payment required to keep the policy active without using cash value.
If that information isn’t clear, request a policy illustration from customer service. It will outline the minimum required payment and how changes may affect the policy. Your financial professional can also help explain these details.
2. Complete a Policy Service Request Form
Most insurers require a written form to make policy changes. These updates usually can’t be completed online or over the phone.
On the form, you’ll specify:
- The amount you want to change the death benefit
- How you want to adjust premiums
- When the new payment amount should begin
Insurers review these requests to help prevent issues, such as underpaying and risking policy lapse or overfunding the policy, which could cause it to become a Modified Endowment Contract (MEC). MECs lose certain tax advantages when accessing cash value.
3. Go Through Underwriting If Necessary
Underwriting is usually not needed for most adjustments. However, it may apply if you request a death benefit increase beyond what your contract allows. In those cases, your insurer may require updated health information, exams, or testing.
4. Review the Updated Policy Illustration
Once approved, your insurer will provide a new illustration showing how the changes affect:
- Death benefit
- Insurance costs
- Potential cash value growth
Use this information to update your budget and financial goals.
5. Repeat the Process for Future Changes
Universal life policies allow flexibility over time. If you want to make additional changes later, you can submit a new request form and repeat the process.
Who Should Consider Adjustable Life?
Now that you know what adjustable life insurance is, the next question is who it may work best for. Adjustable life insurance may be a good fit for:
- Business owners with uneven income: Those whose revenue rises and falls may like the ability to pay more during strong years and less during slower periods.
- People expecting life changes: Adjustable life can work well for someone who may need more or less coverage over time, such as after major family or financial changes.
- Those who can afford permanent coverage: These policies cost more than term life insurance. In return, they offer cash value growth and coverage that does not expire.
Case Studies: Adjustable (Universal) Life Insurance
Case Study 1: Flexible Premiums
Carl owns a fishing charter and tour company. His income is strong in the summer and much lower in the winter. He purchases a flexible premium adjustable life policy with a target cost of $800 per month.
- Summer payments: $2,000 per month
- Winter payments: $0
Ten years into the policy, Carl’s business hits a rough patch. He pauses premium payments for one year to focus on recovery. When business improves the following year, he resumes payments at a higher amount to catch up.
Case Study 2: Adjustable Death Benefit
Susan buys a $400,000 universal life insurance policy after having her first child. Unsure whether she will have more children, she adds a guaranteed insurability rider.
Four years later, Susan has another child and increases her coverage by $100,000 without new health underwriting.
After her children finish college, Susan reassesses her needs and lowers the death benefit to $300,000. This reduces her monthly premium. She keeps more cash value for retirement while maintaining a death benefit for her family.
Is An Adjustable Policy Right for You?
An adjustable life insurance policy may be a good fit if flexibility matters most to you. These policies let you change your premium and death benefit as your needs change over time.
That flexibility comes with added responsibility. Adjustable life insurance requires ongoing attention and careful planning. You need to monitor the policy to help ensure insurance costs are covered so coverage stays in place long term.
If you prefer a simpler option, consider these alternatives:
- Whole life insurance:
- Same premium for the life of the policy
- More predictable for potential cash value growth
- Term life insurance:
- Lower cost than adjustable life
- Coverage lasts for a set period, not your entire life
A financial professional can help you decide which option aligns best with your goals. If you choose adjustable life insurance, they can also help set up the policy and assist with future changes.
Conclusion
Adjustable life insurance provides long-term coverage with the ability to change premiums and death benefits as financial needs evolve. It suits people who value flexibility and are comfortable monitoring policy costs and cash value. Comparing it with simpler or lower-cost options can help determine whether it fits your goals and budget.
Explore how adjustable life insurance can adapt to your changing life needs. Request a Free Life Insurance Quote
