Characteristics of Adjustable Life Insurance Policies

Adjustable Life (AL) is a “flexible premium” “adjustable death benefit” type of permanent cash value insurance. It is essentially a hybrid combination of Universal Life (UL) and ordinary level premium participating life insurance.

AL Has Features of Universal Life

In contrast with ordinary level premium, level death benefit policies and similar to UL, AL gives the policyowner the flexibility to change the plan of insurance. That is, within limits, the policyowner may change the premium and/or the level of death benefit. Note that when policyowners make changes to an AL contract, the guarantee period will also change. In general, the policyowner may:

  • increase or decrease the premium;
  • increase or decrease the face amount;
  • lengthen or shorten the guaranteed protection period; and/or
  • lengthen or shorten the premium payment period.

Increases in the face amount usually require evidence of insurability. Also, an increase in premiums requiring an increase in the face amount to stay within the definition of life insurance guidelines of Code section 7702 usually will require evidence of insurability.

Despite its similarities, do not confuse AL with universal life (UL), which is often called flexible premium adjustable life. Direct-recognition, current assumption policies, such as UL, “unbundle” the policy elements and explicitly show mortality and expense charges and interest credits. In addition, they credit interest directly to cash values.

In contrast, most AL policies’ elements are bundled. Like traditional participating policies, the pure protection and savings components are not segregated or stated separately. However, policyowners may make partial surrenders, up to the sum of premiums they have paid, without surrendering the entire policy, or paying income tax (assuming the policy is not treated as a modified endowment contract).

Like many participating policies in the market today, most AL policies are “indirect recognition interest sensitive” or “indirect recognition current assumption” policies. The insurance company’s favorable investment, mortality, and expense experience are indirectly reflected in the level of dividends that the company actually pays, or directly reflected as additional credits to cash values.

AL Has Features of Ordinary Level Premium Whole Life Insurance

In addition to the bundled nature of its policy elements, AL has all the usual features of ordinary level premium whole life insurance including:

  • a minimum interest guarantee;
  • guaranteed maximum mortality charges;
  • cash values;
  • nonforfeiture values;
  • a policy loan provision;
  • dividend options;
  • a reinstatement period; and
  • settlement options.
  • Similar to other traditional forms of insurance, various options or riders are available including:
  • waiver of premium;
  • guaranteed purchase or insurability;
  • accidental death benefits; and
  • cost of living adjustments.

Although the policyowner has flexibility in selecting the plan of insurance, changes are generally permitted only at specified intervals and with advance notice to the insurer. Between adjustment periods, the policy is a level premium, level death benefit policy. Depending on the particular premium and death benefit levels chosen, the policy can assume the form of almost any traditional term or whole life policy from low-premium term through ordinary whole life to high premium, limited pay whole life.

Policyowners generally may ask to set premiums to zero without the policy lapsing (or without invoking the automatic policy loan provision), although this virtually always requires notice to the insurer. The minimum annual premium is typically equivalent to the premium for a five-year term policy. In contrast with UL and similar to ordinary level premium policies, once a policyowner has selected a given plan of insurance, the policyowner must pay premiums as scheduled unless the policyowner notifies the insurer of his or her desire to change the plan of insurance. The plan of insurance defines the length of the guarantee at any point in time. The insurance company computes the schedule of cash values based on the current program of premium payments, the face value, and the term or duration of coverage. The insurance company recomputes the cash value schedule each time the policyowner opts to change the plan of insurance.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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