What type of life insurance allows you to increase and decrease the death benefit?

Publications and Resources

What You Should Know About Life Insurance. An ACLI guide to help you choose the right life insurance products to meet your needs.

Tips on Buying Life Insurance. A list of buying tips, excerpted from "What You Should Know About Life Insurance."

State insurance department directory. The State Insurance Department Directory, with contact information for 50 states, the District of Columbia, Puerto Rico, Guam, and the U.S. Virgin Islands. Includes names and phone numbers for key personnel and specific subject contacts.

There are two types of life insurance: term and permanent. Term insurance provides protection for a specific period of time. Permanent provides lifelong protection.

Term Insurance

Term insurance covers a defined period (one to 30 years) and only pays benefits if you die during the defined time. Depending on the terms of the policy, premiums will remain constant or increase each year. Some policies can be renewed at the end of the term, but premium rates will usually increase.

Term insurance is designed to cover needs that will disappear in time, such as mortgage or tuition payments. Initially, premiums for term insurance are lower than for permanent insurance, which enables you to buy higher levels of coverage at a younger age. Term insurance does not offer cash value buildup.

Life insurance provided through an employer is most commonly term insurance. When an employee leaves, coverage is terminated. Most states require a conversion privilege, which allow employees to convert their policy to permanent policy when they leave their job.

Permanent Insurance

Permanent insurance builds up cash value over time and provides lifelong protection as long as you pay the premiums, which can be flexible and paid periodically to meet your personal financial needs.

The cash value is different from the policy's face amount. The face amount is the money that will be paid to your beneficiary. Cash value is an amount that increases over time tax-deferred.

The cash value can be used to cover premium payments, to purchase additional insurance, or as collateral for a loan. Loans must be paid back with interest or the death benefit paid to the beneficiary will be reduced.

You also can convert the cash value of permanent insurance into an annuity, which can provide you with an income for life.

The policy also can be canceled or surrendered for its cash value. You may owe taxes on some of the cash value if the sum exceeds what you have paid in premiums.

A permanent life insurance policy is available with provisions (riders), such as those that permit the policyholder to purchase additional insurance without proof of insurability, to cover long-term care costs, or to collect death benefits if he or she becomes disabled or terminally ill. Riders and their costs vary among policies.

While term insurance is what is commonly offered in the workplace, some employers offer permanent life insurance to their employees as a self-funded benefit. Employees can retain coverage after leaving the company by paying premiums directly to the insurer.

Variations of permanent life policies:

Whole or ordinary life. This is the most common type of permanent insurance. Generally, the premiums remain constant over the life of the policy. The cash value grows based on a fixed interest rate.

Universal or adjustable life. A universal life policy allows you to pay premiums in any amount and at any time, subject to certain minimums or maximums set forth in the contract. It also may allow you to increase death benefits (usually subject to evidence of good health).

Variable life. A variable life policy provides death benefits and cash values that vary according to how premiums are invested. You choose among several investment options that reflect a range of risk including stocks, bonds, and accounts that guarantee interest and principal. By law, purchasers must be provided with a prospectus when purchasing variable insurance. The prospectus includes financial statements and outlines investment objectives, risks, and operating expenses.

The cash value of a variable policy is not guaranteed and the policyholder bears that risk. If the market does not perform well, your cash value and death benefit may decrease. Some policies guarantee that the death benefit does not fall below a minimum level.

Adjustable life insurance is a hybrid policy that combines characteristics from term life and whole life insurance. An adjustable life policy is a form of permanent insurance, which is designed to last your entire life as long as premiums are paid into the plan.

Also known as flexible premium adjustable life insurance, the policy has a cash value component that grows with the insurer's financial performance but has a guaranteed minimum interest rate. Adjustable policies have pros and cons but can be a good alternative to whole life insurance if you want added flexibility in case your financial needs change.

How does adjustable life insurance work?

Adjustable life insurance or universal life works like other life insurance products but has the added benefit of flexibility, depending on your financial scenario. The policy has a death benefit that is paid out tax-free to a beneficiary if the insured were to pass away, and premiums are paid on a monthly or annual basis.

Since adjustable life insurance is a form of permanent insurance, a portion of the premiums goes toward the cost of insurance (such as administrative fees and death benefit coverage) while the other portion is put toward the cash value. As this cash value grows, it can be used in a variety of ways. For example, it can be used for taking out a loan or paying for premiums.

Over the lifespan of an adjustable life policy, you can change three components of your coverage: the premiums, death benefit and cash value. However, the insurer decides when and how often you get to make these adjustments.

Adjustable life insurance offers flexible cash value and premiums

Adjustable life insurance has a cash value component separate from the death benefit. If you put more money into the policy than required, the cash value will increase more quickly. You can also use the adjustable life insurance policy's cash value to pay a part or the entirety of premiums, making your payments flexible over time.

For example, if you experience a financial hardship, such as a death in the family, you could pay the minimum premium set by the insurer during one period and then resume typical payments once the hardship is over. On the other hand, many people choose to pay the maximum premium during the first years of the policy so the cash value can grow more quickly.

The cash value in a flexible premium adjustable life insurance policy grows based on the interest rate of your insurer's financial portfolio. As mentioned above, there is a minimum annual interest rate that is guaranteed to grow your cash value. But if the insurer has a positive market performance, then your cash value will grow at a higher rate of interest. An adjustable life insurance policy's cash value can be used as:

• Surrender value: You can cancel a life insurance policy and give it back to the insurer. In this case, you would "surrender" the death benefit and in return receive the accumulated cash value, which would be subject to a taxable gain.
• Loan: You have the ability to borrow money from the insurer and use the cash value as collateral. Any policy loans would be subject to the insurer's interest rates, though these are typically very low.
• Premium payments: Cash value can be used to pay all or part of the premium required to fund the policy. It is important to remember that if the cash value drops to zero, the policy could lapse.

Adjustable life with an index account option

Adjustable life insurance with an indexed option is similar to a standard adjustable life policy, but the cash value growth is tied to the financial performance of an index. The interest rate will increase or decrease if the index that you have chosen performs well or poorly during a period.

An indexed account is similar to variable life insurance in that you can choose to invest the cash value in different subaccounts. Each insurer chooses its own indexes, but common options include the Nasdaq-100 and Russell 2000. Overall, indexed life insurance has a greater potential return than whole life insurance but also has the risk of slower growth if the underlying index performs poorly.

What is a 7702 plan?

Permanent life policies that have a cash value component, such as flexible premium adjustable policies, are often referred to as 7702 life insurance. This designation simply means that they are compliant with section 7702 of the tax regulations for life insurance. Life insurance has many tax advantages, including a tax-free death benefit distribution. The tax regulation created a limit on what could be classified as a life insurance product so that other investment vehicles could not take advantage of the tax benefits of life insurance.

Can you change the death benefit in an adjustable life policy?

Adjustable life insurance allows you to decrease or increase the death benefit as your coverage requirements change. If an increase is large enough, then you may be required to undergo an additional medical exam and pay higher premiums. In the case of a decrease, you may be able to pay lower premiums or have no premiums at all if your cash value has grown enough to pay for the policy.

For example, say your children are all self-sufficient and are no longer dependent on you. At that point, you may not need a large death benefit. You could decrease the face amount with an adjustable life insurance policy to accurately cover your needs and lower ongoing payments.

What makes adjustable life insurance different from other kinds of life insurance?

Adjustable life insurance differs from other life insurance policies in that it is customizable to your individual needs and can change with your financial requirements. Below we have compared adjustable life insurance to other popular insurance products.

Adjustable life vs. whole life insurance

Whole life insurance differs from adjustable life insurance in that it offers less flexibility. Whole life has a guaranteed fixed interest rate at which the policy's cash value grows. This means that even if the insurer's portfolio performs well, you will only get the fixed interest rate.

Compared to an adjustable life policy, which has an interest rate that can increase when the insurer performs well, you may lose out on potential gains with a whole life policy. On the other hand, when the insurer performs badly, the interest rate for an adjustable life policy could be smaller than the guaranteed rate offered by whole life insurance.

Whole life insurance can be beneficial if you want a simpler product with slightly cheaper rates. Whole life policies have constant premiums that are guaranteed to stay at the same level. This can be comforting to people who want to purchase life insurance but don't want to worry about the policy costs changing later on in life.

Adjustable life vs. variable life insurance

Variable life and adjustable life insurance are both forms of permanent insurance, but the primary difference is in how the cash value grows. As mentioned above, adjustable life policies have a minimum interest rate, but your cash value can increase more quickly depending on the insurer's financial performance. For variable life, your interest rate depends on the investment categories that you have selected from a list offered by your insurer. This can include investment categories tied to stocks, bonds, treasury bills and other investment securities.

Since you are selecting the mode of cash value growth, there is typically no guaranteed minimum interest rate. Therefore, variable life insurance can have an interest rate that is close to zero and significantly less than that of an adjustable life policy. This is how variable life insurance is a more "risky" investment product when compared to more stable policies like whole and adjustable life insurance.

What are the pros and cons of adjustable life insurance?

Flexible premium adjustable life insurance can be appealing if you know you may have changing coverage needs in the future. The ability to adjust policy components depending on your financial situation or future goals can be useful in an insurance policy. For example, if you are expecting to have a child, then you may realize you need more insurance. In this case, if you had adjustable life insurance, you could easily increase premiums and the policy face value to compensate for the added need.

Adjustable premium life insurance is also attractive if you want the ability to adjust premiums based on your financial situation. For instance, if you're currently a high earner and want to minimize costs in retirement, you can overfund an adjustable policy during the first several years of coverage and use its cash value to pay premiums later.

However, flexible premium policies and other permanent insurance policies can be costly since cash value insurance comes with a higher premium. This is an important factor to weigh when deciding what type of life insurance to purchase.

Which type of life insurance has a decreasing death benefit?

What type of policy has a death benefit that adjusts?

What is an increasing death benefit option?

What could reduce the amount of the death benefit?