What is adjustable life insurance?

Pros and cons of adjustable life insurance

Pros:

• Flexible premiums: With adjustable life insurance, you can lower your premium payments, and change the due date, or skip a payment altogether. This flexibility is helpful if you lose a source of income and need to shrink your premium payment to fit a smaller budget. Note that your policy's cash value will pay the difference between your original premium and the lowered premium amount. Therefore, you need enough accrued value before lowering your payment.
• Adjustable coverage: You can increase or decrease your policy's death benefit, practical during certain life events. For example, if you have a child, you can bump up your coverage without taking out a brand-new policy. Likewise, you could reduce your coverage once your dependents become independent, i.e., they move out of the house.
• Cash value builds: Your policy's cash value builds over time, giving you an extra financial resource. You can borrow against your life insurance policy's cash value, use it to pay your premiums, or possibly add it to your policy's death benefit (only some insurers allow this and for a significantly higher premium).

Cons:

• Higher costs: Since you can change many aspects of an adjustable life insurance policy, they generally cost more than other types of life insurance. Certain changes, such as significantly increasing your death benefit, will raise your premium and require additional underwriting (meaning your insurer will reevaluate the cost of insuring you).
• Restrictions apply: Your insurer may restrict when and how frequently you can adjust your policy. You generally can't change your policy on the fly. Check with your insurer to see what conditions you must satisfy before modifying your coverage amount, premiums, etc.
• Variable interest rate: The cash value of an adjustable life insurance policy grows based on a variable interest rate that is tied to market conditions. So, your policy's cash value growth is less predictable than other types of permanent life insurance with a fixed interest rate, such as whole life. Learn about the differences between whole life and universal life insurance.

Can you cash out an adjustable life insurance policy?

It's possible to "cash out/cash in" an adjustable life policy while still alive. However, your insurer may have restrictions on when you can do so. If your policy has a cash surrender value, then you can sell your policy back to your insurer in exchange for the accumulated cash value of the policy. Surrendering the policy effectively ends your coverage, forfeiting your policy's death benefit. You may also have to pay taxes on the cash value amount you receive.

The other way to cash out a policy is to take a loan against its value. Note that you must pay back the loan with interest; otherwise, the amount owed will be subtracted from your death benefit when you die. Learn more about cash value life insurance.

Is an adjustable life insurance policy right for me?

Adjustable life insurance makes sense if you want life insurance that lasts your entire life and offers more flexibility. Other types of life insurance essentially lock you into a specific coverage and premium amount for the policy's life. But with adjustable life insurance, you can change those elements of your policy to accommodate your ever-changing life circumstances.

Consider these scenarios where an adjustable life policy would be beneficial:

• Having a child: You can increase the coverage amount on your existing policy to cover the cost of raising your child, including everyday expenses and tuition.
• Losing a job: If you're unemployed and have sufficient cash value, you can decrease your premium payment while job hunting.
• Kids moving out: You could lower your coverage amount, and therefore your premiums, since your kids no longer depend on you financially.

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