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How an Adjustable Life Insurance Policy Works


Life insurance can supply financial protection for your loved ones in case of your untimely passing. Many different types of life insurance exist, most of which call for policyholders to pay unvarying premiums in exchange for set coverage amounts. Adjustable life insurance, also known as universal life insurance, offers more flexibility. The policyholder can change the premium, benefit amount and cash value. A financial advisor can help you determine if adjustable life insurance fits your budget and insurance needs.

Adjustable Life Insurance Basics

Life insurance is a contract with an insurance company that gives a policyholder a way to provide financial support for family members or other dependents upon the death of the insured. In exchange for premium payments by the policyholder, the insurance company pays a named beneficiary a sum of money called a death benefit when the insured dies.

The insurance industry has developed many different types of life insurance. The broadest categories consist of term life insurance, which covers the insured’s life for a specific time period and permanent life insurance, which is intended to remain in effect for as long as the insured lives.

Adjustable life insurance, also called universal life, is a kind of permanent coverage. Adjustable life stands out because it allows policyholders to adjust various components of their policies.

For instance, whole life insurance, another type of permanent coverage, has fixed premiums and coverage amounts for life. With adjustable life, policyholders can alter premiums, death benefits and cash value. This can provide helpful flexibility to help the policyholder adapt to changes in their insurance needs or financial situation.

Adjusting Premium Payments 

A couple talking about an adjustable life policy

One key feature of adjustable life insurance is the ability to change your premium payments. You can pay lump sums, skip payments, increase the payment amount or decrease the payment amount.

Premium flexibility can be a valuable resource if your budget changes. For instance, if you experience a short-term loss of income due to illness, unemployment or another cause, you can opt to pay a smaller premium for a time until your income recovers. This can let you keep a policy in force when otherwise it might lapse due to not paying the premiums.

Changing the Cash Value Amount 

A portion of each premium a policyholder pays goes toward building cash value that earns interest. Policyholders may be able to borrow against this cash value, depending on the policy terms.  

Unlike other types of life insurance with cash value features, adjustable life policyholders can adjust the cash value allocation up or down. Increasing cash value means you will have more funds you can borrow from later. Lowering it can let an adjustable policyholder decrease the current premium due, at the cost of reducing the funds that will be available in the future.

Modifying the Death Benefit

Adjustable life policyholders can also raise or lower their death benefit amounts within limits set by their policy. Raising your death benefit increases costs but better protects your beneficiaries. Lowering it reduces expenses but provides less payout for dependents.

As your income and family obligations change, you may want to adjust your death benefit. For instance, as children reach adulthood and become able to financially support themselves, you may want to reduce the death benefit. Conversely, if a spouse or child develops health issues that increase their financial dependence on you, raising the death benefit can provide them with greater support in the event of your passing.

Adjustable Life Insurance Pros and Cons

Adjustable life insurance offers more flexibility than other types, so you can modify your policy as your needs change. Any changes you choose to make may come with advantages and potential disadvantages, however. Flexible premiums let you adjust the amount you pay as a premium. The risk here is that if you lower your premiums, it may reduce the death benefit or cause the policy to lapse.

An adjustable death benefit makes it possible to increase or decrease the death benefit as your needs change.  On the downside, increasing the death benefit may require higher premiums. You may also have to get a new medical exam to be approved for a higher death benefit.   

Adjusting the cash value, which is available with some policies, can help keep the policy affordable or allow you to build up larger amounts to invest. Investing in the cash value component can enable this to grow over time. However, you may have limited investment options and poor investment performance could cause the cash value to decline.

Bottom Line

A couple and their advisor discussing life insurance options

Adjustable life insurance differs from other types of life insurance in that it can adapt over time to policyholders’ changing budgets and insurance needs. You may be able to change the premium, death benefit, cash value and other features of the policy. This flexibility can significantly increase the utility of life insurance in your financial plan. However, making the best use of adjustable life coverage requires diligence on your part to avoid lapsed policies or other unintended consequences.

Tips for Life Insurance

  • Working with a financial advisor can ensure your adjustable life insurance policy aligns with your broader financial goals and estate plans. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

Photo credit: © Chernetska, ©, ©