Adjustable life insurance is essentially a traditional fixed premium, fixed benefit policy.
Insurance shoppers can consider AL for almost any life insurance need.
Some of the key considerations with adjustable life insurance include:
- The policy loan provisions;
- The policy loan interest rate;
- Whether or not the company uses a direct recognition method to determine the dividend paid on policies with policy loans;
- The dividend interest rate (the rate that must be earned on the company’s investments to justify the projected dividends);
- The current crediting rate;
- The method used to determine the amount of investment income allocable to the policy (portfolio method, new money method, or some weighted average); and,
- The client’s financial stability and strength.
The items of special importance when evaluating AL policies are the adjustment provisions and the commonly offered guaranteed insurability options. Look for policies with more liberal adjustment provisions. All else being equal, prospective insureds probably should favor policies that permit more frequent changes in the plan of insurance and that permit them sooner after the policy issue date. Similarly, they should prefer policies that permit larger and more frequent face amount increases without evidence of insurability. However, all else is never quite equal. More liberal adjustment provisions may involve higher expense charges. More liberal guaranteed insurability provisions generally will require higher premium charges.
Another key consideration is the quality of service. Changes in the plan of insurance require re-computation of the premium payment plan, cash value schedules and projected dividend schedules, and may involve a new underwriting evaluation if the company requires evidence of insurability. This service generally comes from a combination of the insurer and the agent. If either the agent or the insurer is slow to perform his or its part, desired changes may not take effect for months.
Continue reading for 5 frequently asked questions about adjustable life insurance, from the 6th Edition of ”The Tools & Techniques of Life Insurance Planning” (2015, The National Underwriter Company).
The change provisions in traditional policies typically require payment of back premiums. (Photo: iStock)
FAQ No. 5: How does the adjustments provision of AL differ from the change provision often found in ordinary whole life insurance policies?
Answer: Adjustments in AL policies are made prospectively only, affecting the future but in no way amending the past. The change provisions in traditional policies typically require payment of back premiums and/or other retroactive adjustments that may affect cash values. Such changes typically become increasingly and prohibitively expensive the longer the policy has been in force.
FAQ No. 4: Do AL policies offer dividend options that are not available with ordinary whole life policies?
Answer: AL policies offer the conventional dividend options—cash, premium reduction, accumulate at interest, and paid-up additions. Some AL policies offer what is called a policy improvement dividend option. With this option, dividends become a part of the cash value and thereafter lose their separate identity. If the current plan of insurance is equivalent to some form of whole life insurance, this option causes the face amount to increase without an increase in premiums or without changing the premium paying period. The effect is essentially the same as buying paid-up additions, except that the policyowner cannot later surrender these amounts without surrendering the policy as a whole. Generally, policyowners of traditional whole life policies may surrender regular paid-up additions separately. If the current plan of insurance is of a term nature, this option will increase the term of coverage.
See also: 15 little-known life insurance tax facts
Code section 7702 outlines what must be included in a life insurance policy contract. (Photo: iStock)
FAQ No. 3: Can policyowners make unscheduled additional premium payments on AL policies similar to those permitted for universal life?
Answer: Most AL policies permit unscheduled additional premium payments. Such payments will lengthen the term of coverage or shorten the premium paying period depending on whether the current plan of insurance is in a term mode or a whole life mode. For example, a large enough payment might change a plan from term from age fifty to term to age sixty-five, or from a life paid-up at age seventy-five to a life paid-up at age sixty-five. Some companies restrict the availability of this feature in the first few policy years.
See also: 10 advantages of term life insurance
FAQ No. 2: Will a change in the plan of insurance cause an AL policy to become a modified endowment contract (MEC)?
Answer: Generally, a change in the plan of insurance that either lengthens the period of coverage or increases the face amount of coverage is treated as a material change in the policy that triggers a new seven-pay test. However, the reconfigured policy is treated as a MEC only if it fails the seven-pay test in its new configuration. In general, the insurance company will inform the policyowner if the desired change may cause the policy to fail the seven-pay test.
Also, a reduction of the face amount of coverage (or, in this author’s opinion, a shortening of the term of coverage) within the first seven policy years triggers a re-computation of the seven-pay test that is based on the reduced death benefit level and is retroactive to the original policy issue date. The closer earlier premium payments were to the original seven-pay premium limit, the more likely is a reduction of death benefits within the first seven years to trigger reclassification as a MEC.
What’s more, a change in the premium payment plan that does not change the level of benefits, such as a change from a whole life level premium payment plan to a paid-up at age sixty-five plan, should not be treated as a material change and should not require new seven-pay testing.
However, if the change in premiums requires a change in the face amount to meet the requirements of life insurance under Code section 7702, the change should be considered material and require new seven-pay testing.
See also: Adjustable life insurance: Pros and cons
Most companies offering AL policies issue them with guaranteed purchase or insurability riders. This provision allows the policyowner to periodically purchase (e.g., every three to five years) a limited amount of additional coverage without proving insurability. (Photo: iStock)
FAQ No. 1: If the option to increase the face amount of coverage requires new evidence of insurability, of what benefit is this option if a person becomes uninsurable?
Answer: The companies that offer AL policies realize that the flexibility to increase the face amount is not that significant if increases require evidence of insurability. Consequently, most companies offering AL policies issue them with guaranteed purchase or insurability riders. This provision allows the policyowner to periodically purchase (e.g., every three to five years) a limited amount of additional coverage without proving insurability. In general, a purchase option expires if the policyowner does not exercise it when it matures, but the later options remain open without proof of insurability. Any desired increase in face amount beyond the limits set in the guaranteed insurability option will require evidence of insurability.
Do not confuse the guaranteed insurability option with the Cost-Of-Living Adjustment (COLA) provision that most companies also offer in their AL policies. The companies generally grant the COLAs without proof of insurability. In some cases, the insurer increases the policy face amount automatically each year by the increase in the Consumer Price Index (CPI) unless the policyowner elects otherwise. The insurer also correspondingly adjusts the premium payment plan upwards. In other policies, the insured has the option to periodically (e.g., every three years) increase the face amount by the change in the CPI since the last adjustment period. In contrast with the guaranteed insurability option, if the policyowner declines the additional coverage at any time, the insurer will permit future COLA increases only after the insured proves insurability.
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