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.

Here's what sets adjustable life insurance apart: it allows you to change your premiums and death benefit as your life circumstances shift.

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

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

Policies allow modification of these components within certain limits, adjusting how much goes toward cash value versus insurance costs, changing your death benefit amount and varying 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 amount 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.

A part of every 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.

If you can't make premium payments due to job loss or unexpected expenses, your policy automatically pulls from the cash value to cover your life 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, allowing earnings to stay invested without annual taxes. Taxes apply only when you withdraw money.
• Withdrawals vs. Loans: Withdrawals up to your total premium payments are tax-free, but any amount above that is 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.
• Stay within the IRS guidelines: Your policy must comply with Internal Revenue Code Section 7702 to keep its tax benefits. There's a limit on how much you can contribute compared to your death benefit.
• Don't trigger the MEC rules: The IRS uses the Modified Endowment Contract (MEC) test to limit your premium payments. Exceed these limits, and you lose the tax-free loan benefit.

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.

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 gives you the most flexibility with payments. Pay extra when you're earning well. Scale back when money's tight, as long as you meet the minimum to keep coverage active.
• Indexed Adjustable Life links your cash value to market indexes like the S&P 500. Gains cap around 10% to 12%, but a guaranteed floor (usually 0% to 2%) prevents losses.
• Variable Adjustable Life hands you the investment steering wheel. You control the investments. Direct your cash value into different subaccounts that work like mutual funds. This option offers the highest growth potential and the highest risk. Your cash value drops when investments perform poorly.
• Multifunded Adjustable Life provides multiple investment options: bond funds, stock funds, money market accounts. Spread your cash value across these choices and adjust the mix as your risk tolerance changes.

The availability and structure of these options depend on the specific insurance products offered by individual insurers. 

Compare your options to find the right policy and provider. Consulting a financial advisor or insurance expert can also help.

Adjustable life insurance offers valuable flexibility but requires active management and comes with specific risks you should understand before purchasing.

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.