What Is the Difference Between Adjustable Life & Universal Life Insurance?

by Alibaster Smith ; Updated July 27, 2017

Adjustable life insurance and universal life insurance are the same type of life insurance policy. Adjustable life insurance is the name given to older universal life insurance policies. These policies were the first universal life insurance policies designed in the 1980s. As adjustable life insurance became more popular and policy designs changed, life insurers started referring to this policy as "universal life insurance" or "flexible premium universal life insurance".

Features

An adjustable or universal life insurance policy is a policy with premiums that are flexible and death benefits that are adjustable. This means that you may change your premium payment every month, if you want to, and you may adjust your death benefits up or down. To adjust the death benefit upwards requires additional underwriting (a medical exam) but adjusting the death benefit down just requires your signature on a form. These policies also have the potential to build cash value, depending on how much premium you pay relative to the death benefit you purchase.

Significance

The significance of adjustable or universal life insurance is that the policy may be structured so that it functions more like whole life or more like term insurance. This flexibility is achieved by varying the premium payments. The insurance company sets a "target premium." The "target premium" is the minimum amount of premium that the policy requires to stay in force assuming no cash value is used to help pay the required premium payments.

But, premiums may be paid below the target premium. If this happens, then the policy's cash value and investment earnings inside the policy will be used to support the death benefit. The death benefit remains in force for as long as there is cash value available. If the cost to support the death benefit causes the cash value to decrease, the policy will eventually lapse. But, the policyholder may simply increase the premium payments or lower the death benefit (or both) to keep the policy in force at any time.

Benefit

The benefit of an adjustable or universal life insurance policy is that the policy gives you the most amount of control out of any life insurance policy you can purchase. This control allows you to purchase as much death benefit you need and alter the death benefit as your needs change without buying another policy.

Disadvantage

The disadvantage to adjustable or universal life insurance is that the policy is based entirely off of insurance company projections and assumptions. The policyholder assumes most of the risk of the policy staying in force.

This is because the policy is an annual renewable term life insurance contract with a separate savings component. The terms policy and savings are inseparable for the purposes of the policy. The cost of insurance is deducted from the cash value savings to pay for the death-benefit proceeds. However, these costs can rise dramatically over time (though they are not guaranteed to do so). The guaranteed interest rate on the policy is also always set very low--typically between 2 and 3 percent. If the cost of insurance rises dramatically and the interest rate paid to the policy falls to the guaranteed rate, many adjustable or universal life insurance policies will lapse. This often happens regardless of any increases in premium payments or decreases in death benefits made by the policyholder.

References

  • "Life Insurance"; Kenneth Black, Jr., Harold D. Skipper, Jr.; 1994
  • "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007
  • "Life & Health Insurance, License Exam Manual, 6th Edition"; Dearborn Financial; 2004

About the Author

I am a Registered Financial Consultant with 6 years experience in the financial services industry. I am trained in the financial planning process, with an emphasis in life insurance and annuity contracts. I have written for Demand Studios since 2009.