Adjustable Life Insurance

A hybrid policy between term life and whole life insurance

What is Adjustable Life Insurance?

Adjustable life insurance is a hybrid policy between term life and whole life insurance. Term life insurance is when the death benefit is paid at the time of death if death occurs within a certain number of years; otherwise, no benefit is paid.


Adjustable Life Insurance


Whole life insurance is when the death benefit is paid at the time of death, regardless of when death occurs. Adjustable life insurance, on the other hand, is a type of permanent insurance that would last the policyholder’s entire life if payments are consistently made. In addition, “adjustable” comes into play where the policyholder can adjust the benefits on the insurance policy depending on their current financial situation.


How Adjustable Life Insurance Works

As mentioned before, adjustable life insurance is a type of permanent insurance that offers the added benefit of flexibility. The premiums are paid on a monthly or annual basis, where a portion of the premiums are paid towards the cost of insurance – such as administrative fees and death benefit coverage – while the other portion goes towards the cash value.

The policyholders are given the option to change the premiums, death benefit, and cash value. The premium is the amount that the policyholders pay for the insurance product, the death benefit is the amount the policyholder’s beneficiaries will receive when the policyholder dies, and the cash value is the tax-deferring savings component in the insurance policy that earns a small amount of variable interest.


Benefits of Adjustable Life Insurance

Individuals who choose adjustable life insurance do so for the flexibility of the policies. The benefit comes in three parts of the policy that can be changed:


1. Premiums

The policyholder is allowed to change the amount or frequency of payments. However, changes have to be within certain limits set by the issuer.


2. Death Benefit

The policyholder is allowed to increase or decrease the amount that is paid out. The increase of the amount may require additional evidence to reassess the risk of the policyholder, whereas a decrease may lower the premiums that are paid.


3. Cash Value

The policyholder can increase or decrease the cash value of the policy by either increasing premium payments or withdrawing funds as a loan with interest.


Drawbacks of Adjustable Life Insurance


1. High premiums

Given the flexibility of adjustable life insurance, it usually comes with a higher price. Because of the cash value attached, the policyholders usually need to pay higher premiums.


2. Volatility

Another drawback of adjustable life insurance is that the policy may be affected by the investment portfolio that it is a part of. If the investment portfolio doesn’t perform well, the interest rate on the cash value will be significantly lower. As such, it is worth noting that most investment portfolios tied with such policies are usually low-risk and well-hedged.

All in all, there are not too many downsides with adjustable life insurance, which is why it is becoming a more popular option.


Who Should Buy Adjustable Life Insurance?

Since the biggest benefit of adjustable life insurance is the flexibility attached, the people who choose the option are usually those who expect their financial situation to change in the future.

In the two examples below, we look at a case where the policyholder wants to increase the premiums paid, and another case where the policyholder realizes they temporarily cannot make the payments.


Example A

John is 30 years old, and he just got married a couple of months ago. John and his wife both work steady jobs as accountants at two different corporations.

A year later, John’s wife gives birth to their first child. With the arrival of the baby, he realizes that he needs more insurance. Since he’s taken out adjustable life insurance, John easily increases the premiums that he pays and the face value of the policy to account for the increased need.


Example B

Freddie is 40 years old, and he works at a restaurant as a busser full-time. He lives at home by himself and comfortably pays off the premiums every month for his adjustable life insurance.

One day, the restaurant burns down, and Freddie finds himself without a job. With no source of income for a couple of months until he finds his next job, he can put off paying the premiums for some time, given his financial situation.

Freddie would essentially put a pause on the premiums and tap into the cash benefits of the policy to pay them down for that specific period. Once he finds his next job and obtains financial security, he can resume paying the premiums.


Additional Resources

CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

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