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.

Adjustable life insurance lets you 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 keeps the policy active when you reduce or temporarily stop premium payments.
You can change these parts within 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 has three payment options:

• Minimum payment: Just enough to keep the policy active. This covers basic insurance costs and fees but won't build much cash value. Target payment: What most insurers recommend. This keeps your coverage for life while building cash value steadily.
• Maximum payment: The most you can put in under tax laws. This speeds up cash value growth for better tax-deferred savings.

Part of each premium payment goes to the cash account that grows over time. This cash value earns interest or investment returns depending on the policy type. You can tap the cash value while you're alive through loans and withdrawals.
Can't make premium payments because of job loss or unexpected expenses? Your policy pulls from the cash value automatically to cover insurance costs and keep coverage active.

Adjustable life insurance has tax advantages, but you need to understand the rules:

• Tax-Deferred Growth: Cash value in your policy grows tax-deferred. Earnings stay invested without annual taxes. You pay taxes only when you withdraw money.
• Withdrawals vs. Loans: Withdrawals up to your total premium payments are tax-free. Amounts above that get taxed as ordinary income. Loans against your policy aren't taxed because the IRS treats loans as debt, not income. If the policy lapses with an unpaid loan, the remaining loan amount may become taxable.
• IRS Compliance Requirements: Your policy must follow Internal Revenue Code Section 7702 to keep 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. Exceed MEC limits and you lose tax-free loan access. Withdrawals and loans become taxable, and you may pay a 10% penalty on earnings if you're under age 59½.

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.