What Is Flexible Premium Adjustable Life Insurance?

Everything you need to know about flexible premium adjustable life insurance and if it is the right option for you.
By Mike Parker
Updated Jul 27, 2022
A group of girls with Flexible Premium Adjustable Life Insurance.
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An adjustable life insurance policy is a unique insurance option that combines parts of term life and whole life insurance policies.

These policies are also known as flexible premium adjustable life insurance and are considered to be whole life insurance plans.

In this article, we will help you understand what adjustable life insurance is, how it works, what it covers, and how to determine whether it's the right insurance option for you.

An insurance agent explaining to a client what Adjustable Life Insurance.

Source: Pexels

What Is Adjustable Life Insurance?

With adjustable life insurance, policyholders have more flexibility than they would with other types of insurance. 

Unlike term life insurance, adjustable life insurance has no end date. Coverage lasts for your whole life as long as you pay your premiums and when you die, your beneficiaries receive a payout known as a death benefit.

What makes these plans different from other types of whole life insurance is that you can change the premium, which will change the cash value contributions; this, in turn, changes the death benefit.

For this reason, people sometimes call it "flexible premium adjustable life insurance" or "adjustable term life insurance."

The policy also builds up a cash value from a portion of your premiums that your insurance company deposits in your savings account for you.

You have the option to give up your policy and receive a part of your policy's cash value after you pay an administrative fee.

Terms You Should Know

Premiums: These are the amounts that policyholders must pay on a monthly or annual basis in order to get coverage.

Death benefit: This is the amount paid to the beneficiary of an insurance policy after the policyholder’s death. It is also known as the face value or payout of an insurance contract.

Cash value: The portion of your policy that earns interest and may be available for you to withdraw or borrow against.

Beneficiary: A person who receives the death benefit (payout) from a life insurance policy in the event of the policyholder’s death.

How Flexible Are Adjustable Life Insurance Plans?

Adjustable life insurance plans offer more flexibility than other types of permanent or whole life insurance. Depending on your plan, you will be able to adjust your:

Premiums:  You can increase, decrease, or stop your premiums altogether depending on changes in your life.

Benefit amount:  You can increase or decrease the death benefit, as well as change the beneficiaries.

Payment schedule: You can change how often you make payments towards your policy and your cash-value account.

An insurance agent explaining how flexible Adjustable Life Insurance plans are.

Source: Unsplash

Adjustable Premium Life Insurance and Cash Value

With an adjustable life policy, you have a cash value that is not part of the death benefit. In order for the cash value to grow, you need to put in more money than is required from premiums.

To make your payments more flexible, you can also use the cash value in your adjustable life policy to pay some or all of the premiums.

As an example, if you have money problems, like a death in the family or a debt that must be paid, you could pay the minimum premium set by the insurance company for a certain amount of time. When your income stabilizes, you could pay your normal premium again.

For example, someone could start by paying their normal premium of $500 a month. If they start to struggle financially, they are allowed to request to pay a lower premium of $300 a month, and then when they are back on their feet, they’ll start paying  $500 again.

However, if you don't pay the maximum premium, your cash value will not grow as quickly.

Flexible premium adjustable life insurance policies have cash values that grow based on the interest rate of your life insurance company’s financial portfolio.

There is, however, a minimum guaranteed annual interest rate by which your cash value must grow, but when the life insurance company does well in the market, your cash value will grow at a higher rate of interest. 

What Is a Minimum Guaranteed Interest Rate?

This is the rate at which the insurance guarantees that it will credit, at a minimum, no matter what interest rates are in the economy or how profitable its investment assets are.

Depending on the contract, this guaranteed rate may be between 1 and 4% (usually 3%).

It's possible to do the following things with the cash value of an adjustable life insurance policy:

  • Surrender Value: The death benefit would be given up in this case, and you would get the built-up cash value instead, which would, unfortunately, be taxed.

  • Loan: You can borrow money from the insurance company and use the cash value as collateral. There would be an interest rate on any policy loans, but these are usually very low.

  • Flexible Premiums: The cash value can be used to pay all or part of your premiums. It's important to keep in mind that if the cash value in the policy drops to zero, the policy will lapse.

One of the biggest benefits of a cash value account is that any money invested in it is tax-deferred. This means that any money you put into your cash-value account will grow tax-free until a later date (when your policy ends). Policies like this are referred to as 7702 plans.

This makes a permanent life insurance policy ideal for high-net-worth individuals and people who want to minimize their tax obligations.

What Is a 7702 Plan?

Permanent life policies with a cash value component, such as flexible premium adjustable policies, are often referred to as 7702 life insurance.

If a policy is a 7702 plan it means it is compliant with the tax rules for life insurance and that people who have these life insurance plans can get their money tax-free when they die.

The section 7702 of the tax regulations for life insurance sets a limit on what can be called a life insurance product. This means that other investment vehicles that aren’t 7702 plans won’t get the tax benefits of life insurance.

An added bonus is that when you borrow money against the policy, you won't have to pay taxes as your debt is considered to be a loan that is non-taxable. Furthermore, and money you loan is tax-deferred for as long as your policy is in place.

A person deciding between Adjustable Life Insurance and Universal Life Insurance.

Source: Pexels

Adjustable Life Insurance vs. Universal Life Insurance

Adjustable life insurance is a type of permanent life insurance that allows policyholders to make changes to their coverage. This can include altering the death benefit, the premium payments, or the length of the policy. 

Universal life insurance is another type of permanent insurance, but it does not offer the same flexibility as adjustable life insurance. 

With universal life, you will typically be locked into a specific premium payment and death benefit amount, and you will not be able to make any changes unless there is a significant change in your financial or health situation. 

Overall, adjustable life insurance is a great option for those who want more flexibility in their life insurance coverage. However, if you prefer a more stable and predictable policy, then universal life insurance may be the better option for you. 

Cash Value.

Source: Unsplash

Pros and Cons of An Adjustable Life Insurance Policy

Even though they are more expensive than term policies, this may be offset by the advantages over the long term.

Adjustable life insurance policies are not ideal for everyone. It might be better for you to get a simple and affordable term policy with death benefits that lasts for a certain amount of time.

The biggest benefit of an adjustable-rate policy is its flexibility. For example, you can choose whether you want to change your coverage length from short-term to long-term insurance or vice versa with adjustable life insurance policies.

However, whether an adjustable life insurance policy makes it easier to deal with financial changes or to give your loved ones financial security, isn't easy to determine.

Adjustable life insurance does offer more control and freedom to policyholders. However, there are some downsides to consider.

Even so, their benefits may outweigh the additional costs. 

Below are a few benefits and downsides of an adjustable life insurance policy to keep in mind:

Allows for flexibility to deal with changes in your financial situation.More expensive than term insurance.
You can increase or decrease the death benefit as your circumstances change.Modest amount of interest earned. You can get higher rates of return by investing elsewhere.
The cash value grows over time. It can also be used to make premium payments or be borrowed against.If you largely increase your death benefit, your premiums may rise.

A person researching the pros and cons of Adjustable Life Insurance.

Source: Pexels

What Is the Average Cost of an Adjustable Life Insurance Policy?

The cost of an adjustable life insurance policy will vary greatly depending on the size of the death benefit, as well as the characteristics of the person who purchased the policy, such as:

  • Age.

  • Medical history.

  • Criminal record.

  • Whether or not they smoke.

Because adjustable life insurance is a type of permanent insurance, it will always cost more than term insurance. 

According to CNN, a term policy with $500,000 coverage would cost an average of $430 annually for a 35-year-old man. A permanent policy, on the other hand, for the same amount of coverage, would cost roughly $4,400 annually.

That’s more than ten times the cost. Rates may differ from one provider to the next, but term life insurance is generally cheaper than most permanent life policies.

Who Should Buy Adjustable Life Insurance?

Adjustable life insurance may be a good choice for people who don't know what the future holds. These policies are structured in a way that lets you change them to meet your needs, with some limitations, of course.

For example, if you have a bad year and make less money, you might be able to get a lower premium with these types of plans. Then when your income is back on track, you could ask to raise your premiums again.

Remember that changes in premiums will usually reflect in the policy's death benefit and cash value.

These types of policies can also be a good option for you if you've used up your other investment options. In some cases, the cash value of adjustable life insurance policies can be tax-deferred.

A person deciding if they should buy Adjustable Life Insurance.

Source: Pexels

Where Can I Learn More about Adjustable Life Insurance?

Adjustable life insurance offers policyholders benefits that they won’t be able to get with other term and permanent life insurance plans. However, you should be aware of the downsides before you commit to a lifelong permanent plan like this.

If you’re interested in learning about adjustable life policies or want to get up to date with the latest information on life insurance, visit our life insurance hub.

We have articles on a range of topics including coverage, costs, life insurance options, and more. If you need more detailed assistance, our team of life insurance agents can assist. Reach out to us at 1-888-912-2132 or send an email to Help@PolicyScout.com to get help with your life insurance questions.