Adjustable Life Insurance: Pure Protection Or Risky Gamble?

Adjustable life insurance, also known as universal life insurance, is a type of permanent life insurance that allows you to modify your policy after purchasing it. This means that you can adjust the premium payments and death benefit as your life circumstances change. This flexibility makes it suitable for individuals who anticipate changes in their financial circumstances or life situations, such as business owners with uncertain revenue or someone who expects possible changes to their family and financial situation. However, adjustable life insurance is generally more expensive than term life insurance and requires more work to manage.

Adjustable life insurance allows you to increase or decrease your premium payments

Adjustable life insurance, also known as universal life insurance, is a type of permanent life insurance that allows you to increase or decrease your premium payments. This flexibility makes it suitable for individuals who anticipate changes in their financial circumstances or life situations.

With adjustable life insurance, you can pay less in some years and more in others, as long as you cover the minimum insurance cost. The insurance cost goes up as you get older. If you pay more than the minimum in a year, the extra money goes into a reserve called cash value, which you can use to cover future premiums.

Adjustable life insurance is a good option for those who want flexibility in a permanent life insurance policy. For example, if you're expecting a child, you can increase your death benefit. If you're out of work, you can decrease your premiums to fit your budget.

However, adjustable life insurance is more expensive than term life insurance. It also takes extra work to manage, as you need to budget more versus a policy that always charges the same amount. Additionally, the cash value growth is less predictable, as it depends on market interest rates, which vary over time.

You can borrow money from your policy using the cash value as collateral

Adjustable life insurance, also known as universal life insurance, is a type of permanent life insurance policy that offers flexible coverage. It allows you to adjust your premiums and death benefit over the course of the policy. One of the key features of adjustable life insurance is the inclusion of a cash value account, which can be utilised in several ways.

One option available to policyholders is to borrow money from their insurance policy, using the cash value as collateral. This means that you are essentially borrowing from yourself, with the accumulated cash value serving as security for the loan. This approach offers several advantages over traditional loans from financial institutions.

Firstly, there is typically no formal credit check or approval process required, as you are borrowing against your own policy. This simplifies the process and makes it a viable option for those who may not qualify for other types of loans. Additionally, the interest rates on policy loans tend to be lower than those offered by banks, making it a more cost-effective borrowing option.

The funds borrowed from your policy can be used for any purpose, providing flexibility to meet your financial needs. There is also no set repayment schedule, giving you the freedom to repay the loan at your own pace. However, it is important to note that interest will accrue on the loan balance, and if left unpaid, it could lead to negative consequences.

If the loan and accumulated interest exceed the policy's cash value, there is a risk of the policy lapsing. In such cases, you may be faced with a significant tax bill, particularly if the outstanding loan amount is greater than the total premiums paid. Therefore, while borrowing from your life insurance policy can be a convenient option, it is crucial to carefully manage the loan and make interest payments whenever possible to avoid these potential pitfalls.

Adjustable life insurance is more expensive than term life insurance

Adjustable life insurance, also known as universal life insurance, is more expensive than term life insurance. Term life insurance is the simplest type of policy to purchase and is generally inexpensive. It lasts for a certain number of years, after which coverage ends. On the other hand, adjustable life insurance is a type of permanent life insurance that offers greater flexibility regarding changes to premiums, cash value contributions, and death benefits. It is more expensive than term life insurance because it provides more features and benefits.

Adjustable life insurance allows the policyholder to adjust their coverage, premiums, and savings component as their financial needs and goals change over time. This flexibility makes it suitable for individuals who anticipate changes in their financial circumstances or life situations, such as business owners with uncertain revenue or those who expect possible changes to their family and financial situation.

The main benefit of adjustable life insurance policies is their flexibility, which makes it easier to navigate changing financial circumstances while ensuring loved ones are provided for. However, this flexibility comes at a cost. Adjustable life insurance policies can charge roughly six to ten times the premium of a term life policy for the same amount of protection.

In addition to being more expensive, adjustable life insurance policies also require more work to manage. Policyholders must carefully plan and budget to ensure they are covering the insurance costs and maintaining sufficient cash value to keep their coverage. If they underpay, they may face higher premiums or lose coverage in the future.

While adjustable life insurance offers the advantage of flexibility, it is important to consider the higher costs and management requirements involved. For those who need a simple and inexpensive policy, term life insurance may be a more suitable option.

The cash value of an adjustable life insurance policy grows based on a variable interest rate

Adjustable life insurance, also known as universal life insurance, is a type of permanent life insurance that offers flexible coverage, premiums, and savings components. This flexibility makes it suitable for individuals who anticipate changes in their financial circumstances or life situations.

The cash value component of an adjustable life insurance policy serves as an interest-bearing savings account. As premiums are paid and interest accumulates, the policy's cash value grows over time. This cash value can be used in several ways:

• Paying premiums: Once the cash value reaches a sufficient amount, it can be used to pay future premiums. This can be especially useful during periods of financial hardship or uncertainty.
• Borrowing: The cash value can be borrowed against, often at a lower interest rate compared to traditional bank loans. However, if the loan is not repaid, the outstanding amount and interest will be deducted from the death benefit.
• Withdrawing: In some cases, it may be possible to withdraw money from the cash value account, as long as it does not exceed the "surrender value" of the policy. Withdrawals may be subject to fees and will reduce the life insurance payout to beneficiaries.

The flexibility of adjustable life insurance policies allows individuals to adjust their coverage based on their evolving needs and circumstances. However, it is important to carefully manage and plan these adjustments to avoid potential issues, such as lapsed policies or increased premiums. Additionally, the interest earnings on the cash value may be modest compared to other investment opportunities.

You can cash out an adjustable life insurance policy

Yes, you can cash out an adjustable life insurance policy. This is possible because adjustable life insurance includes a savings component known as the "cash value". This cash value grows over time and can be used while the policyholder is still alive.

There are two ways to cash out an adjustable life insurance policy. The first is to take a loan against the cash value of the policy. The second is to cancel the policy and cash out the accumulated cash value. However, it is important to note that cashing out the policy will result in the loss of coverage and the forfeiture of the policy's death benefit. Additionally, taxes may need to be paid on the cash value amount received.

The cash value of an adjustable life insurance policy can be used in several ways, such as supplementing retirement savings or taking out a loan. It is important to carefully manage the cash value to ensure that there are sufficient funds to cover future premiums and maintain coverage.

Frequently asked questions