Adjustable Life Insurance: Pros and Cons

What is Adjustable Life Insurance?

Often referred to as a universal life insurance or UL, adjustable life insurance is often described as a hybrid of a term and participating whole life insurance policy. These types of permanent life insurance policies are designed to have “flexible premiums” and an “adjustable death benefit.”

Adjustable life policies offer a minimum interest rate, plus the flexibility to make changes to your death benefit and premium. The reason that many consumers choose this type of policy over whole life is because of its flexibility.

How Does Adjustable Life Insurance Work?

First thing you will do if/when you purchase an adjustable life insurance policy is choose your death benefit which is the tax-free sum of money paid to your loved ones when you die.

A minimum monthly or annual premium will be set based on your age, amount of death benefit you choose, and your health status. You can choose to pay more premium than the minimum if you are looking for strong cash value growth.

Each month when you pay the premium, a portion goes to pay for the cost of insurance and any fees, while the remaining is invested into the cash value. While the cash value grows, the cost of insurance each year decreases, until the cash value is equal to the death benefit.

With adjustable life, you can use the cash value to decrease your premium payment or to pay it all if the need arises. The cash value is used to keep the policy in-force while premiums are not being paid.

The cash values in these policies earn interest differently which we discuss below.

Death benefits are guaranteed, but can be adjusted as your needs change during life. If increasing the death benefit, you will be required to show evidence of insurability again.

Adjustable life insurance also comes with a feature that when you die, your beneficiaries not only get the death benefit but can also receive what cash value remains.

Types of Adjustable Life

As we talked about earlier, adjustable life insurance is just another name for a universal life insurance.

With that said there are 4 main types of universal life insurance. The two main differences between the types of universal life insurance are how the interest is calculated to the cash value and the fees charged to maintain the policy. The 4 types are:

• Traditional Universal Life
• Guaranteed Universal Life
• Indexed Universal Life
• Variable Universal Life

Traditional Universal Life Insurance

Traditional Universal Life became popular in the 80’s mainly because whole life insurance can get expensive. Traditional UL’s usually come with a much lower premium than whole life and provide coverage to age 120.

Universal life’s cash value accumulation is set each year on the consumers anniversary date and is guaranteed for a year. The interest accumulated in a Universal Life policy is determined buy the life insurance company who issued the policy.

The downside to a traditional adjustable life policy is the premiums are not guaranteed. If the policy is not funded properly, this could lead to premium increases down the road. 

Guaranteed Universal Life Insurance (GUL)

Guaranteed Universal Life Insurance or GUL is the most similar to a whole life policy because it comes with a guaranteed premium option. The interest earned by a GUL policy is based on a rate set by the insurer, which is based on the company’s own investment portfolio.

GUL policies are for consumers who are looking for the lowest cost permanent life insurance available, along with the guarantees that a whole life policy provides.

Sample Rates for GUL policy at Preferred Rates/Non-Smoker

Top Guaranteed Universal Life Insurance Carriers (GUL)

While many life insurance companies offer guaranteed universal life insurance, we have chosen the top 3 companies based on price, financial ratings, and features. They are:

North American– North American not only offers a low priced guaranteed universal life product, but also guaranteed indexed universal life insurance. These policies also come with the living benefits rider at no extra charge.

American National (ANICO)– American National’s GUL product is competitively priced and also comes with the living benefits rider at no extra cost. The feature that stands out from the rest is the return of premium option. With American National’s GUL product you are able to cash in the policy at year 20 or 25 and have all premiums refunded.

Protective Life– Protective Life offers one of the lowest priced GUL products on the market today. They have great ratings and excellent customer service, which makes them one of the leaders in the industry.

Indexed Universal Life Insurance (IUL)

Indexed Universal Life Insurance (IUL) is an universal life insurance policy whose interest is tied to market indexes, such as the S&P 500 or Nasdaq. Death benefits are guaranteed, but the premiums are not (with the exception of a few companies).

All policies come with a guaranteed floor of 0%, which means if the market index that you are participating in has negative interest for the year, your policy earns 0%. You cannot lose.

With that said, IUL polices also cap what the most interest you can make in a year. Most caps are set around 11%-12% annually. Lets recap, these policies come with a guaranteed floor so you cannot lose, but they cap what the most interest you can earn in a year also.

Indexed Universal Life polices are also used when investing into a LIRP or Life Insurance Retirement Plan.

Variable Universal Life Insurance (VUL)

Variable Universal Life Insurance (VUL) is probably the most complicated of the 3 types of universal life insurance. Death benefits are guaranteed, but just like the indexed universal life products, the premium is not.

A VUL is unique in how the cash value’s interest is calculated. Just like other adjustable life policies, part of the premium pays the cost of insurance and fees, while the remaining is invested into the cash value.

The difference is that in a variable life, your cash value account is tied to sub-accounts which are very similar to mutual funds.

There are no caps or floors attached to these policies, which means you are credited with all the interest that is earned that year. But you also endure all the losses if the sub-accounts are in the negative.

What’s “Adjustable” in an Adjustable Life Insurance Policy?

In adjustable life insurance, there are three components that are “adjustable” or flexible. They are:

Death Benefit: Death benefits can be raised or lowered at anytime on adjustable life insurance. However, if you raise the death benefit, you will have complete an exam and prove you are still in good health. Also if you increase the death benefit, premiums will probably increase.

Premiums: Your universal life insurance policy allows you to increase your premium if you are looking to increase your cash value or you can reduce premiums, or stop paying them all together (cash value is used to cover cost of insurance).

Cash Value: After part of the premium is used to pay the cost of insurance, the remaining is invested into the cash value. These cash values will earn a minimum interest, but if also invested into market indexes (like Indexed UL & Variable UL), these values could grow more or even lose.

Increasing the amount of premium you pay in will increase the value of the cash value. In contrast, if you use the cash value to pay the premium it will decrease your cash value.

Adjustable Life Insurance vs. Term Life Insurance

Adjustable Life Insurance is a permanent life insurance product. This means you will have the coverage forever, unlike term which is only for a certain period of time.

The advantages of adjustable life compared to term life insurance are:

• Flexibility
• Permanent Protection
• Cash Value Accumulation
• Withdrawals or Loans from the cash value

The dis-advantages of  adjustable life  compared to term life insurance are:

There really is only 1:

• Premium: Premium for an adjustable life insurance policy is always going to be higher and sometimes as much as 5 times highter than term life insurance. This is a major drawback.

Adjustable Life Insurance vs. Whole Life Insurance

Since both of the policies are permanent, what is the difference between the two.

The advantages of adjustable life insurance compared to whole life insurance are:

• Premiums are usually about 1/3 cheaper than whole life insurance
• Flexible Premium and Death Benefit
• Interest is variable on an adjustable life policy, which means cash value could grow faster

The dis-advantages of adjustable life insurance compared to whole life insurance are:

• While premiums can be cheaper than whole life insurance, many adjustable life premiums are not guaranteed
• Whole life cash value is guaranteed, while adjustable life’s cash value is variable

Our Thoughts

Adjustable Life Insurance or most commonly referred to as universal life insurance is a great asset to have in your financial portfolio. With that being said it is very important to fully understand what you are purchasing because of the many different types. Each type functions differently and if you don’t fully understand what you have, it could be disastrous later in life.

If you already own an adjustable life policy like the ones mentioned above, it’s important to do periodic reviews with your agent and request updated illustrations in order to keep an eye on changes that may be going on and effect the policy later down the road. If you have any questions or comments please give us a call or comment below.

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