What Is Adjustable Life Insurance?

Adjustable life insurance is permanent coverage that lets you change your premium payments, death benefit and cash value as your finances shift. You can scale your death benefit up or down and adjust premiums to match financial changes, keeping your policy relevant across different life stages.

Like other types of life insurance, adjustable life insurance pays your beneficiaries a death benefit when you pass away. Premium payments keep coverage active.

What sets adjustable life insurance apart: you can change your premiums and death benefit when your life circumstances shift.

Each premium payment splits into insurance costs (covering the death benefit), policy expenses (administrative fees) and cash value accumulation. 

Cash value grows over time and sustains the policy when you reduce or temporarily stop premium payments. 

You can modify these components within certain limits: adjust how much goes toward cash value versus insurance costs, change your death benefit amount and vary premium payments based on your budget. 

Your adjustable life policy offers three payment approaches:

• Minimum payment: Just enough to prevent policy lapse. This covers basic insurance costs and fees but won't build much cash value.
  Target payment: The sweet spot most insurers recommend. This maintains your coverage for life while steadily building cash value.
  Maximum payment: The most you can contribute under tax laws. This accelerates cash value growth for better tax-deferred savings potential.

Part of each premium payment goes to the cash account that grows over time. Depending on the policy type, this cash value earns interest or investment returns. You can use the cash value while you're alive through loans and withdrawals. 

When you can't make premium payments due to job loss or unexpected expenses, your policy automatically pulls from the cash value to cover insurance costs and maintain coverage.

The tax advantages of adjustable life insurance boost your long-term financial strategy, but understanding the rules is essential:

• Tax-Deferred Growth: Cash value in your policy grows tax-deferred. Earnings stay invested without annual taxes. You pay taxes only when withdrawing money.
• Withdrawals vs. Loans: Withdrawals up to your total premium payments are tax-free. Amounts above that are taxed as ordinary income. Borrowing against your policy isn't taxed because the IRS treats loans as debt, not income. If the policy lapses with an unpaid balance, the remaining loan amount may become taxable.
• IRS Compliance Requirements: Your policy must comply with Internal Revenue Code Section 7702 to maintain tax benefits. The code limits contributions relative to your death benefit. Exceed these limits, and your policy loses favorable tax treatment.
• Modified Endowment Contract (MEC) Rules: The IRS uses the MEC test to limit premium payments within the first seven policy years. If you exceed MEC limits, you lose tax-free loan access. Withdrawals and loans become taxable, and you may face a 10% penalty on earnings if you're under age 59½.

Tax rules change frequently and vary by individual circumstances. This information is for educational purposes only and should not be considered tax advice. Consult a qualified tax professional about your specific situation.

Learn More: Is Life Insurance Taxable?

To adjust your policy, contact your insurance provider to discuss the changes you want to make. Whether you're increasing the death benefit due to family growth, reducing premiums because of changing finances or adjusting cash value for better investment returns, your insurer can guide you through the process.

Some changes require additional underwriting, particularly if they involve increasing the death benefit.

Adjustable life insurance comes in several types, each designed for different comfort levels with risk and investment control. Options include indexed policies (where your cash value follows market indexes) or multifunded policies (letting you spread money across different investment choices).

• Flexible Premium Adjustable Life lets you adjust payments based on your income. Pay extra when earnings increase. Reduce payments during tight periods, provided you meet the minimum required to maintain coverage.
• Indexed Adjustable Life ties cash value growth to market indexes like the S&P 500. Your gains cap at 10% to 12% annually, while a guaranteed floor (usually 0% to 2%) protects against losses.
• Variable Adjustable Life puts you in control of investments. You direct cash value into subaccounts that function like mutual funds. Variable policies deliver the highest growth potential with the highest risk; your cash value drops when investments underperform.
• Multifunded Adjustable Life offers several investment channels: bond funds, stock funds and money market accounts. You spread cash value across these options and shift allocations as your risk tolerance evolves.

Not all insurers offer every type. Product features and availability vary by company. A financial advisor or insurance agent can help match policy types to your financial goals and risk tolerance.

Adjustable life insurance delivers flexibility for changing circumstances but demands ongoing oversight and carries risks worth evaluating before purchase.

Adjustable life insurance (also called flexible life insurance) lets you modify premiums, death benefits and cash value to suit changing financial circumstances and life stages.

Adjustable life insurance benefits those expecting life changes, like family expansion or financial shifts. You can raise or lower your death benefit based on current needs, matching coverage to your life's demands without overpaying.

We answer common questions about adjustable life insurance policies.