Choosing the right life insurance plan for your needs can be difficult. There are so many different types of plans available, and a lot of the terminology can be very confusing if you’re shopping for life insurance for the first time. One of the terms you might hear thrown around while choosing your policy is adjustable life insurance. In this article, we’ll go into detail about what adjustable life insurance is, as well as the pros and cons of this type of policy.
What is adjustable life insurance?
Adjustable life insurance goes by a few different names. It’s sometimes called flexible premium adjustable life insurance, or you might also hear the term universal life insurance. These terms mean the same thing in almost all cases. Adjustable life insurance is often thought of as a hybrid of term life insurance and whole life insurance. It provides coverage for your entire life, like a whole life insurance plan, but it also has some of the flexibility that term life insurance typically provides.
When you purchase your adjustable life insurance policy, you will choose a lump sum amount for your death benefit. This is the amount that will go to your beneficiaries when you die. Adjustable life insurance policies also have a cash value component like a whole life insurance policy does. When you pay your premiums, part of your payment goes towards the cash value of your insurance. The cash value will earn interest over time, and your monthly payments will go down as your cash value increases. There is a minimum interest rate that you will earn on your cash payments, but it’s also linked to an investment portfolio, and if your investments perform well, your interest will increase. Once your cash value equals the entire amount of the death benefit, you will no longer need to pay regular premiums on the insurance policy. If you can’t make your monthly payments for any reason, you can tap into your cash value to pay for them.
One of the nice things about adjustable life insurance, however, is that it allows you to change the amount of your death benefit as needed. For example, you might want to increase your death benefit to cover higher expected expenses, or you might want to decrease it after you’ve paid off debts or your children have reached adulthood. You also have some control over the amount and frequency of the premiums you pay, which you wouldn’t necessarily get with other types of life insurance policies.
Benefits of Adjustable Life Insurance Policies
There are many benefits to taking out an adjustable life insurance policy. They’ve become very popular because they offer a nice balance of coverage and flexibility. Here are some of the benefits of an adjustable life insurance policy.
- Adjustable life insurance policies cover you for your entire life, so you never have to worry about renewing the policy. This is helpful because you avoid having your premium costs reassessed. Monthly premiums tend to increase as you get older, so there is a good chance that you would end up paying more after renewing a term life insurance policy, whereas with adjustable life insurance, your rate can stay the same the entire time.
- The premiums on an adjustable life insurance policy decrease over time and the cash value of your policy accrues value on its own. This means you’re essentially passively earning money that will eventually go towards your death benefit. There’s a good chance that the premiums you pay at the beginning of the policy will be the highest you will ever pay.
- If you are struggling financially or just don’t want to pay your premiums for a certain period of time, you can tap into the cash benefit to pay them for you. One of the biggest reservations many people have about setting up a life insurance policy is that their financial situation will change and they will no longer be able to afford the premiums. Adjustable life insurance essentially removes this concern. Keep in mind, however, that tapping into your cash benefit will decrease its value and might affect the cost of your premiums.
- Adjustable life insurance offers a lot of flexibility as to the size of the death benefit and your payment schedule. Many other life insurance plans are very rigid with their payment requirements, but for many people, this is quite impractical, as income and jobs can change many times throughout your life. With adjustable life insurance, you can change how often you make your payments, and you may even be able to change your payment amounts in some cases. You can also adjust the size of the death benefit at any time. For many people, this is very beneficial, because they need less coverage as they get older. When your kids are young or you are paying off loans, you’ll need a higher benefit to cover these expenses, but as you age, you may only need enough to cover funeral expenses. You can also choose to up the size of your death benefit to account for lifestyle changes. However, if you do choose to do this, keep in mind that your life insurance company may reassess the cost of your premiums.
Downsides of Adjustable Life Insurance
While there are many benefits to getting adjustable life insurance, there are also some downsides that are important to be aware of before you sign up for your policy. Here are some of the most common problems that people encounter with adjustable life insurance.
- The biggest potential downside of adjustable life insurance policies is that they are more expensive than term life insurance. This is because they have the cash value attached, and cash value policies are always more expensive. If you don’t have a large budget for life insurance, you may be priced out of adjustable life insurance policies.
- Another potential downside to this type of insurance is that some policies can be very strongly affected by the investment portfolio attached to it. If your investment portfolio does not perform well, the interest rate on your cash benefit is going to be very low. You may be better off using a different type of investment product if you are trying to make money. Luckily, there are many adjustable life insurance policies that are very low risk in this regard. Talk to your insurance agent to find the option that is best for you.
- Adjustable life insurance is a bit more involved than other types of life insurance. If you want to just sign up for a plan and set up automatic monthly payments, this might not be the best choice for you. While it doesn’t necessarily involve extra work, it does require you to keep up with the changes in your premiums as your cash benefit grows.
There really aren’t many downsides to an adjustable life insurance plan, which is why they are increasing in popularity. They combine so many of the benefits of other types of life insurance plans, so if you are having a difficult time deciding which one you want, an adjustable life insurance plan is a good place to start.