Adjustable Life Insurance
| Adjustable Life Insurance |
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| See also |
Adjustable Life Insurance it is a contract between life insurance company and policy owner. This is whole life insurance plan. This policy offers to conform to the policy's face amount, premium, and length of protection. With Adjustable Life policy, this is not necessary to issue another policy or make a new application. Adjustable Life implement responsiveness to adjust any form of insurance (for example the whole life) without dropping, adding, or exchanging policies. Adjustable Life Insurance is based on money purchase concept [1]. Adjustable Life is a type of permanent life insurance.
Permanent life insurance
There are principles that determine permanent insurance [2]:
- Premium payments very often are the same each year.
- In the early years of the contract, premium payments are higher than for term life insurance.
- Premium payments might not be continued because of some circumstances.
- Tax of interests is deferred.
- Without long term commitment permanent life policies have no sense, because there is not a lot of cash surrender value accumulate in the early years of the contract.
Modifying Adjustable Life
There are three cornerstones of cash-value insurance[3]:
- premium
- the face amount of the policy
- rate of cash-value accumulation
With Adjustable life insurance it is possible to modifying discretionary component and In the other two corresponding changes occurred. These changes might be made without supplying new proof of insurability. For example: if you increase the face amount, the cash-value accumulation might slow and your premiums might increase in return, or some different combination might apply [4].
How insurance policy works
Barrel's metaphor below shows how cash-value life insurance works[5]
- Once in a while, the policyholder pays premium into the policy and then the level of water increases in the barrel.
- Every month the insurance company takes out its expenses and mortality charges and the water wanes.
- If in the barrel is enough water the policy lapse/terminal.
- Water which remains in the barrel is the accumulated value.
- If you subtract the surrender fees you receive a surrender value.
Examples of Adjustable Life Insurance
- Adjustable Universal Life Insurance (AUL): AUL is a type of permanent life insurance policy that provides flexibility in premium payments and a range of options for death benefit payouts. The policyholder can adjust the cash value, death benefit, and other features to meet their changing needs.
- Term Adjustable Life Insurance (TAL): TAL is a type of life insurance policy that allows policyholders to adjust the death benefit and premium payments within certain limits. The policyholder pays a fixed premium over a specified period of time and can choose to increase or decrease the death benefit during the term.
- Variable Universal Life Insurance (VUL): VUL is a type of permanent life insurance policy that offers the policyholder the ability to invest part of their premiums in a variety of investment options. The death benefit and cash value of the policy will vary depending on the performance of the investments.
Advantages of Adjustable Life Insurance
An Adjustable Life Insurance policy offers a number of advantages for the policyholder. These include:
- Increased flexibility – With Adjustable Life insurance, the policyholder is able to adjust the face amount, premium, and length of protection without having to issue a new policy or make a new application. This flexibility makes it easy to adapt the policy to changing needs and circumstances.
- Lower premiums – Adjustable Life Insurance policies typically have lower premiums than other types of permanent life insurance policies.
- Death benefit – The policyholder’s beneficiaries receive a death benefit when they pass away.
- Cash value – The policy accumulates cash value over time, which can be used to help supplement retirement income or to pay premiums in the event of a disability.
- Tax advantages – Adjustable Life Insurance policies are tax-advantaged, which means that the policyholder can benefit from tax savings.
Limitations of Adjustable Life Insurance
An Adjustable Life Insurance is a type of permanent life insurance, but there are some limitations that come with this type of policy. These limitations include:
- Premiums are typically higher than those associated with other types of life insurance policies.
- The policy owner is limited in their ability to make adjustments as there are restrictions on how much of the policy can be adjusted.
- The policy owner may be limited in the amount of coverage they can purchase due to the restrictions on the amount of coverage that can be adjusted.
- The policy owner is not allowed to purchase additional insurance or to borrow against their policy.
- The policy may not be eligible for tax benefits.
- The policy's death benefit is limited to the amount of coverage that was purchased.
- The policyowner may be responsible for additional fees associated with adjusting the policy.
One approach related to Adjustable Life Insurance is Whole Life Insurance. This type of policy provides lifelong protection and builds cash value. Whole Life Insurance premiums remain level for the life of the policy and the policy pays out regardless of when death occurs.
Another approach related to Adjustable Life Insurance is Universal Life Insurance. This type of policy combines permanent life insurance protection with a savings component. This policy has flexible premium payments and allows policyholders to adjust their coverage levels.
Third approach is Variable Life Insurance. This type of policy allows policyholders to invest their premiums into sub-accounts, such as stocks and bonds. Variable Life Insurance offers potential for greater growth than other permanent life insurance policies.
Finally, Indexed Universal Life Insurance is a type of permanent life insurance that offers policyholders the potential to earn interest on their cash value based on changes in an external index, such as the S&P 500.
In summary, Adjustable Life Insurance is a type of permanent life insurance and there are four approaches related to it: Whole Life Insurance, Universal Life Insurance, Variable Life Insurance, and Indexed Universal Life Insurance. Each type of policy has its own features and benefits.
Footnotes
References
- AICPA (2018), Audit and Accounting Guide: Life and Health Insurance Entities 2018, John Wiley & Sons
- Bisys Educational Services (2004), Life and Health Insurance License Exam Cram: Life hlth insure lic exam, Pearson Education
- Garman E.T., Forgue R. (2014), Personal Finance, Cengage Learning
- Gayton S.J., Handler S.P. (2012), Guide to Personal Financial Planning for the Armed Forces, Stackpole Books
- Mishra K. (2010) Fundamentals Of Life Insurance: Theories And Applications, PHI Learning Pvt
- Steuer A. (2010), Questions and Answers on Life Insurance: The Life Insurance Toolbook, Greenleaf Book Group
Author: Magdalena Łubiarz
