Life and Health Insurance · Life Insurance · 6 min read
Flexible and Interest-Sensitive Life
- Differentiate the structure, flexibility, and insurability requirements of adjustable life, universal life, and interest-sensitive whole life policies.
- Explain how unbundling, flexible premiums, interest-crediting rates, loans, and partial surrenders function within universal life insurance.
- Compare Option A and Option B death benefit designs under universal life, including their effects on the net amount at risk, insurance charges, and the statutory corridor requirement.
Adjustable Life Insurance
Adjustable life insurance combines features of term insurance and whole life insurance in a single contract. It allows the policyowner to adjust three key elements over time: the policy face amount, the premium payment, and the period of protection. Cash value can build in an adjustable life policy when premiums and credited growth exceed the cost of insurance and policy expenses. However, the policyowner cannot directly control how the insurer invests the cash value.
Adjustments to the policy alter how the contract behaves. An increase in premium can shorten the premium paying period or lengthen the protection period. Depending on the contract, you may be able to reduce premiums by extending the premium paying period or requesting a shorter protection period; a lower payment alone does not automatically change the coverage. For example, if your income falls, you may be able to request a lower scheduled premium and a shorter protection period, if the contract permits that change.
When changing the death benefit, insurability rules apply. Increasing the face amount typically requires the insured to provide proof of insurability to protect the insurer against adverse selection. Decreasing the face amount does not require proof of insurability.
Common mistakes
- Assuming that paying the universal life target premium guarantees that the policy will remain in force indefinitely.
- Believing that taking a universal life policy loan permanently lowers the stated policy face amount, rather than recognizing that loans use cash value as collateral and unpaid balances reduce the death benefit.
- Thinking that reducing the face amount on an adjustable life or universal life policy requires proof of insurability.
- Confusing Option A and Option B death benefit structures by assuming Option A provides an increasing death benefit at all times rather than a generally level death benefit.
Key points
- Adjustable life combines term and whole life features and may allow changes to the face amount, premium, and protection period under the contract; face amount increases typically require evidence of insurability, while decreases generally do not.
- Universal life unbundles mortality charges, administrative fees, and interest credits, disclosing them in detail on annual statements.
- Universal life premiums are flexible, but if the value available to pay charges is insufficient and no applicable no-lapse guarantee protects the policy, you must make the required payment during the grace period to avoid a lapse.
- Policy loans use cash value as collateral without reducing face amount, while partial surrenders permanently reduce account value and generally reduce death benefits.
- Universal life Option A provides a generally level death benefit with a decreasing net amount at risk, whereas Option B pays the face amount plus account value with a higher net amount at risk.
- Federal tax rules can require a minimum death benefit relative to cash value to maintain life insurance tax status; the requirement varies with age and the applicable tax test.
- Interest-sensitive whole life uses scheduled premiums, guarantees a fixed death benefit and minimum cash value schedule, and credits declared interest rates subject to contractual guarantees.
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