What Is A Flexible Premium Adjustable Life Insurance Policy?

At the time that an individual applies for a universal life policy, he or she selects the level of premium, cash value, death benefit and premium-paying period that is desired. If the policyowner wishes to accumulate a certain amount of cash value by a certain period of time, say 20 years, the cash value can be targeted to accumulate to that amount by the 20th year and the amount of premium required to accomplish that objective will be calculated. If no cash value is ever factored into the premium, or, in other words, zero cash value is targeted for age 100, the policy will look and function just like a level term policy to age 100. If the minimum premium is paid each year, then the policy will function just like an annually renewable term policy.

Universal life offers one of two death benefit options to the policyowner. Option A is the level death benefit option, and Option B is the increasing death benefit option.

Under Option A (Level Death Benefit option), the death benefit remains level while the cash value gradually increases, thereby lowering the pure insurance with the insurer in the later years. Notice that the pure insurance is actually decreasing as time passes, lowering the expenses, and allowing for greater cash value in the older years. The reason that the illustration shows an increase in the death benefit at a later point in time is so that the policy will comply with the “statutory definition of life insurance” that was established by the IRS and applies to all life insurance contracts issued after December 31, 1984. According to this definition, there must be a specified “corridor” or gap maintained between the cash value and the death benefit in a life insurance policy. The percentages that apply to the corridor are established in a table published by the IRS and vary as to the age of the insured and the amount of coverage. If this corridor is not maintained, the policy is no longer defined as life insurance for tax purposes and consequently loses most of the tax advantages that have been associated with life insurance.

Under Option B (Increasing Death Benefit option), the death benefit includes the annual increase in cash value so that the death benefit gradually increases each year by the amount that the cash value increases. At any point in time, the total death benefit will always be equal to the face amount of the policy plus the current amount of cash value. Since the pure insurance with the insurer remains level for life, the expenses of this option are much greater than those for Option A, thereby causing the cash value to be lower in the older years (all else being equal).