Adjustable Life Insurance: The Pros and Cons of Flexible Premiums

Of all the adult things you do in your life, buying life insurance is one of the most important. With so many different types of life insurance to choose from, though, the process can be both confusing and frustrating. We're here to help you compare adjustable life insurance to other types of life insurance on the market, and to help you decide if it's the best type of policy for you.

What is adjustable life insurance? As the name suggests, adjustable life insurance can be adjusted throughout the life of the policy. Say a policyholder wants $500,000 in death benefits while their children are young, but by the time they're nearing retirement they only need $200,000. An adjustable policy allows them to make changes based on their current situation. It's the flexible premium of adjustable life insurance that sets it apart.

An adjustable life insurance policy is a "hybrid" between a term life policy and whole life insurance. Term life is a policy that offers a death benefit for a specific number of years -- typically between five and 30. The policyholder makes the payments and the term insurance policy stays in effect until the end of the term.

On the other hand, a whole life policy can last a policyholder's entire life, with no term limit. As long as premiums are paid as agreed, the death benefit remains in effect. Part of each premium goes toward the cost of the policy (including administrative fees), part goes toward the death benefit, and part goes toward building cash value.

Like whole life insurance, adjustable life insurance is a type of permanent life insurance. That means a policyholder can keep coverage in effect their entire life, with no end date. As long as premiums are paid, the policy remains active. And like most other types of permanent life insurance, cash value accrues in an adjustable life policy. This is money the policyholder saves tax-deferred, earning a small amount of variable interest. There is typically a minimum interest rate the money can earn, and while that sounds good, chances are, a better rate can be found elsewhere in the market.

When a policyholder adjusts the death benefit, the premium also changes. When they decrease the benefit, the cost of the policy goes down. If they choose to increase the death benefit, the premium rises.

Term life is far less expensive than adjustable life. It does have an "expiration date" though. For example, if a person takes out a 30-year term life policy in 2022, it will expire in 2052. The ideal situation is for someone to purchase a term life policy with the option of converting it into another type of policy later as their situation changes.

A whole life policy may accrue cash value like an adjustable life policy, but it does not allow a policyholder to adjust their death benefit or premiums.

Made popular in the 1980s and 1990s, universal life insurance is essentially the same thing as adjustable life insurance. It's a matter of what the company selling the product calls it. A universal life policy also gives the policyholder the flexibility to raise or lower their death benefit (and with it, adjust their premium).

The big difference between adjustable life and variable life is how the money is invested. As mentioned, the cash value in an adjustable life insurance policy is invested in a portfolio chosen by the insurance company. The cash value in a variable life insurance policy also rises or falls with the market, but is based on the investments chosen by the policyholder from a menu of options. These are typically mutual funds.

Neither of these policy types should be confused with indexed universal life insurance, a type of permanent insurance with cash value that's tied to a stock market index chosen by the insurance company, such as the S&P 500 or the New York Stock Exchange.

No one can answer this question with certainty, because it depends on the situation. Let's say someone has a family history that includes a serious health condition. The person is healthy but is concerned about their ability to acquire insurance in the future. It may make sense for them to buy an adjustable life policy while they're young and healthy and hold onto it throughout life.

For a person without such health concerns, a term life policy with the same death benefit could cost as little as one-sixth of a permanent policy. The policyholder could easily invest the savings, earning more on their money through the years.

The truth is, there's no one-size-fits-all coverage for all customers. The best life insurance companies are those that lay out the options and answer questions until a person hones in on a policy that provides the best fit.