Friday, January 05, 2007

Adjustable Life Insurance

Introduced in 1971, Adjustable Life was the first successful attempt to design a policy with dramatically enhances flexibility. You can periodically adjust the amount of death benefit, the amount of premium or even the type of coverage (Level Term to Straight Life to 20-Pay Whole Life, etc.) as your needs change over your lifetimes. In other words, its a traditional policy that has flexibility.

If you are deciding to get an Adjustable Life insurance (which I don't recommend), you will be presented with three choices. You can only make a decision on two of them, which will determine the third choice. Your choices are: 1) How much protection do you want? 2) How much premium can you afford? 3) The type of plan (term, whole life, etc.)

Let's say you want $150,000 coverage and can only afford to pay annual premiums of $500. These two choices (along with your age and other underwriting factors) might dictate that the contract will initially be a term to age 65 policy. Or, if you want cash value (which I don't recommend), you can decide you want a Whole Life plan and be able to pay annual premium of $800.

When the policy is enforced, you can change your face amount, change your premium payment period, or change the protection period. Remember, you can only control two choices, which will determine the third choice. There may be some restrictions on how often you can make adjustments in your policy and you may have to pay a fee to make the adjustments. If you want to increase your coverage amount, you will need to provide proof of insurability.

The problem I have with Adjustable Life is that it is complicated product to understand. Sure it gives you flexibility, but at what price are you willing to pay to make these adjustments? What you don't understand is that when you make adjustments, you can affect the value of the policy. Also, Adjustable Life are proven to be somewhat cumbersome and costly from an administrative point of view. The relative cost per thousand of coverage under the various plans tend to be somewhat higher than with traditional policies (whole life and term). When Adjustable Life is in cash value mode, it earns a fixed rate of return.

Since the time Adjustable Life came out, most companies have evolved it into a Universal Life or Variable Life policy, which have proven to be ven more effective in meeting a broader range of consumer needs.

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