What Is A Flexible Premium Adjustable Life Insurance Policy?

Discover financial flexibility with our guide on Flexible Premium Policies. Explore insurance options that adapt to your changing needs, offering versatile premium payment structures. Uncover insights into the benefits, coverage, and customization features of flexible premium policies. Whether you’re planning for short-term financial goals or long-term security, our resource empowers you to tailor your insurance plan to match your lifestyle. Stay informed about the latest trends and innovations in flexible premium policies. Optimize your financial strategy with adaptable premium solutions. Dive into the world of financial flexibility and explore the advantages of Flexible Premium Policies. Explore now!

Adjustable Life

There are several other types of whole life policies. While they all have the same key characteristics, they may also offer unique features based on how the policyowner pays the premium or how the premium is invested. Flexible premium policies allow the policyowner to pay more or less than the planned premium.
 

Adjustable life was developed in an effort to provide the policyowner with the best of both worlds (term and permanent coverage). An adjustable life policy can assume the form of either term insurance or permanent insurance. The insured typically determines how much coverage is needed and the affordable amount of premium. The insurer will then determine the appropriate type of insurance to meet the insured’s needs. As the insured’s needs change, the policyowner can make adjustments in his or her policy. Typically, the policyowner has the following options:

  • Increase or decrease the premium or the premium-paying period;
  • Increase or decrease the face amount; or
  • Change the period of protection.

The policyowner also has the option of converting from term to whole life or vice versa. However, increases in the death benefit or changing to a lower premium type of policy will usually require proof of insurability. In the case of converting from a whole life policy to a term policy, the insurer may adjust the death benefit. The policyowner may also pay additional premiums above and beyond what is required under the permanent form in order to accumulate greater cash value or to shorten the premium-paying period.

Although adjustable life policies contain most of the common features of other whole life policies, the cash value of an adjustable life policy only develops when the premiums paid are more than the cost of the policy.

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Universal Life

Universal life insurance is also known by the generic name of flexible premium adjustable life. That implies that the policyowner has the flexibility to increase the amount of premium paid into the policy and to later decrease it again. In fact, the policyowner may even skip paying a premium and the policy will not lapse as long as there is sufficient cash value at the time to cover the monthly deductions for cost of insurance. If the cash value is too small, the policy will expire.

Since the premium can be adjusted, the insurance companies may give the policyowner a choice to pay either of the two types of premiums:

  • The minimum premium is the amount needed to keep the policy in force for the current year. Paying the minimum premium will make the policy perform as an annually renewable term product.
  • The target premium is a recommended amount that should be paid on a policy in order to cover the cost of insurance protection and to keep the policy in force throughout its lifetime.
If an insured skips a premium payment on a universal life policy, the missing premium may be deducted from the policy’s cash value. The policy will NOT lapse.
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As well as being a flexible premium policy, universal life is also an interest-sensitive policy. Although the insurer guarantees a contract interest rate (usually 3 to 6%), there is also potential for the policyowner to get a current interest rate, which is not guaranteed in the contract but may be higher because of current market conditions.

A universal life policy has two components: an insurance component and a cash account. The insurance component of a universal life policy is always annually renewable term insurance.

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).

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Variable Universal Life

Variable life insurance (sometimes referred to as variable whole life insurance) is a level, fixed premium, investment-based product. Like traditional forms of life insurance, these policies have fixed premiums and a guaranteed minimum death benefit. The cash value of the policy, however, is not guaranteed and fluctuates with the performance of the portfolio in which the premiums have been invested by the insurer. The policyowner bears the investment risk in variable contracts.

In variable contracts, the policyowner bears the investment risk (assets in a separate account).
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Because the insurance company is not sustaining the investment risk of the contract, the underlying assets of the contract cannot be kept in the insurance company’s general account. These assets must be held in a separate account, which invests in stocks, bonds, and other securities investment options. Any domestic insurer issuing variable contracts must establish one or more separate accounts. Each separate account must maintain assets with a value at least equal to the reserves and other contract liabilities. Assets in the separate account cannot be commingled with assets in the general account.

Variable universal life is a combination of universal life and variable life. Like universal life, it provides the policyowner with flexible premiums and an adjustable death benefit. Like variable life, the policyowner rather than the insurer, decides where the net premiums (cash value) will be invested. Also, like variable life, the cash values are not guaranteed, and the death benefit is not fixed. The cash value and/or death benefit may increase or decrease over the life of the policy depending on the investment performance of the underlying sub-account. The death benefit, however, generally cannot decrease below the initial face amount of the policy. A producer must also be licensed for both securities and life insurance in order to sell variable universal life.

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What Is A Flexible Premium Adjustable Life Insurance Policy?

Discover financial flexibility with our guide on Flexible Premium Policies. Explore insurance options that adapt to your changing needs, offering versatile premium payment structures. Uncover insights into the benefits, coverage, and customization features of flexible premium policies. Whether you’re planning for short-term financial goals or long-term security, our resource empowers you to tailor your insurance plan to match your lifestyle. Stay informed about the latest trends and innovations in flexible premium policies. Optimize your financial strategy with adaptable premium solutions. Dive into the world of financial flexibility and explore the advantages of Flexible Premium Policies. Explore now!

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