There are many advantages to utilizing adjustable life insurance. If you are unsure about buying an adjustable life policy, this simplified list will share the 7 largest benefits to this kind of policy:
- Policyowners have discretion or flexibility in selecting the schedule of premiums that they will pay until they next request a change in the plan of insurance.
- Similar to ordinary level premium whole life policies, once a policyowner has chosen a premium payment plan, the policy has an element of forced saving until the policyowner requests a change in the premium payment plan. Many people who lack the discipline to continue a regular savings program will find this feature attractive.
- The policyowner may change the face amount of coverage or the term of coverage. The insurance company will permit decreases in the face amount of coverage at virtually any time. Policyowners who reduce death benefits within the first seven years of issue should do so only with the advice and counsel of their insurance advisers because such death benefit reductions may subject them to adverse tax consequences under the Modified Endowment Contract (MEC) rules. Insurance companies generally permit increases in face amounts, subject to evidence of insurability. Increases in the death benefit may also subject the policy to a new test period under the MEC rules. (See discussion under “Tax Implications” below).
- Most AL policies offer a cost of living agreement that automatically increases the face amount in response to increases in the CPI without evidence of insurability. Commonly, the premium is also correspondingly adjusted upwards.
- Cash value interest or earnings may accumulate tax-free or tax-deferred, depending on whether gains are distributed at death or during a lifetime.
- The cash values are not subject to the fluctuations in market value characteristic of longer-term municipal bonds and other longer-term fixed income investments when market rates change.
- Policyowners can borrow policy cash values at a low net cost. Although policyowners must pay interest on policy loans, cash values continue to grow and are credited with at least the minimum guaranteed rate in the policy. Consequently, the actual net borrowing rate is less than the stated policy loan rate.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM