What is adjustable life insurance (short answer)
– Adjustable life insurance is a form of permanent life insurance that you can change after you buy it. Key policy features — mainly the premium, the death benefit (face amount), and how the policy’s savings component is used — can be altered within rules set by the insurer and tax law.
Plain-language definitions
– Permanent life insurance: coverage intended to last the insured’s whole life, provided required payments are made.
– Premium: the payment you make to keep the policy in force.
– Death benefit (face amount): the payout to beneficiaries when the insured dies.
– Cash value: an interest-bearing savings account inside the policy that grows over time and can be withdrawn or borrowed against while the insured is alive.
– Underwriting: the insurer’s health and risk review; it may be required when you request certain increases in coverage.
– Rider: an optional add-on to a policy that modifies coverage (examples: waiver of premium, accidental death).
How adjustable life insurance works (core mechanics)
– You pay premiums into a permanent life policy. Part of your premium covers the cost of insurance and fees; the remainder accumulates as cash value.
– The cash value earns interest that can vary with market interest rates (so growth rates may rise or fall by year).
– The policy owner can typically: change how much they pay (within limits), use cash value to help cover future premiums, increase or decrease the death benefit, and add or remove certain riders.
– Increasing the death benefit often triggers additional underwriting (and higher premiums). Reducing the face amount usually only requires written instruction.
Why people choose adjustable life insurance
– Flexibility: You can tailor payments and benefits as life circumstances change (for example, higher payments when earning more; lower payments during tight budgets).
– Lifetime coverage: Unlike term life, these policies don’t expire as long as required costs are met.
– Accessible savings: Cash value gives a tax-advantaged source of funds (subject to rules) that you can borrow from or withdraw.
Key limitations and trade-offs
– Cost: Permanent policies with cash value are generally more expensive than term life coverage.
– Complexity: You must monitor payments, cash value levels, and policy charges. Failing to provide sufficient premiums or exhausting cash value can lead to lapse.
– Returns: Cash-value interest rates are usually modest compared with many outside investments, after accounting for fees and insurance costs.
– Tax limits: U.S. tax rules (IRC Section 7702) set design limits on premiums and benefits; violating those limits can change the tax treatment of the policy — for example, causing gains to be taxed.
What can be adjusted (three main levers)
1. Premiums — frequency and amount can usually be changed, as long as you meet the policy’s minimum cost-of-insurance requirements and any tax-qualification limits.
2. Cash value — increases when you pay more than the cost of insurance; decreases if you withdraw funds or use the cash to pay premiums. If cash runs out and you don’t restore it, the policy may lapse.
3. Death benefit — you can request a higher or lower face amount. Increasing it commonly requires extra underwriting; decreasing it is usually permitted on request.
Common riders
– Waiver of premium: temporarily suspends premium payments if you become disabled.
– Accidental death/dismemberment: extra payout for specified accidents.
(Availability and terms depend on the insurer.)
Tax rules to watch
– U.S. Internal Revenue Code Section 7702 defines design rules for life insurance contracts. These rules limit how much premium you can pay relative to the death benefit if you want the policy to retain favorable tax treatment (e.g., loans from cash value are typically tax-free if the policy is structured correctly). Many insurers place safeguards in contracts to avoid violating these rules.
Simple worked numeric example (illustrative)
Assumptions (illustrative only; actual policy fees and costs will reduce cash value):
– Annual premium paid into the policy each year: $5,000.
– Net interest credited to cash value: 3% annually.
– No withdrawals or loans, and no rising insurance costs for this example.
Use the future-value of an annuity formula:
FV = P * [((1 + r)^n − 1) / r]
Where P = yearly payment, r = annual interest rate, n = number of years.
After 5 years:
FV ≈ 5,000 * [((1.03^5 − 1) / 0.03)] ≈ 5,000 * 5.30913 ≈ $26,545.
What this means in practice:
– Roughly $26,500 could be the cash-value accumulation after 5 years under these simple assumptions. Actual cash value would be lower after insurer charges (cost of insurance, administrative fees, and rider costs). If you later reduce your premiums, the policy could use part of this cash to cover the shortfall — but continued use will deplete the account and may trigger higher future premiums or lapse.
Practical checklist before you buy or change an adjustable life policy
– Confirm the policy type: adjustability is a feature of universal/adjustable life — verify the insurer’s exact product name and provisions.
– Ask for an illustration: get projected values under multiple interest-crediting scenarios (base, favorable, and conservative).
– Know the minimum premiums and the policy’s “cost-of-insurance” schedule (how much of your premium buys coverage vs. goes to cash value).
– Check surrender charges, loan interest rates, and other fees.
– Confirm whether death-benefit increases require medical underwriting and how much they will raise premiums.
– Verify anti-IRC-7702 protections: ensure the insurer limits contributions so the policy remains tax-qualified.
– Review available riders and costs for each.
– Plan monitoring: decide how often you’ll review statements and what triggers a policy review (e.g., big market rate changes, life events).
Monitoring and maintenance (recommended steps)
1. Review annual policy statements and illustrations.
2. Compare actual cash-value crediting rates to the illustration assumption.
3. If cash value is shrinking or near zero, contact your agent immediately to discuss options (pay more, reduce the death benefit, or change riders).
4. Document any requested changes in writing and keep copies.
How adjustable life compares to whole life and universal life
– Whole life: generally fixed premiums, fixed death benefit, and guaranteed cash-value growth. Simpler to manage but less flexible.
– Adjustable life = universal life: they are essentially the same family — designed to allow flexibility in premiums and death benefit, with cash value that earns interest which can vary.
Where to get more reliable information
– Investopedia — adjustable life insurance overview
https://www.investopedia.com/terms/a/adjustable-life-insurance.asp
– Cornell Legal Information Institute — 26 U.S.C. § 7702 (definition and tests for life insurance status under the tax code)
https://www.law.cornell.edu/uscode/text/26/7702
– Internal Revenue Service — Topic No. 503, Life Insurance Proceeds
https://www.irs.gov/taxtopics/tc503
Brief educational disclaimer
This explainer is for educational purposes and does not constitute individualized investment or insurance advice. Product terms and tax treatment vary by insurer and jurisdiction; consult a licensed insurance professional and a tax advisor before buying or changing a policy.