Flexible life policies include adjustable life, universal life, and variable life insurance. Although each of these has its own unique characteristics and features, the one common factor that they have is flexibility, giving the policy owner numerous options in terms of premiums, face amounts, and investment objectives. He or she can change these components of the policy in response to changing needs and circumstances.
An adjustable life policy gives the policy owner the options to adjust the face value, premium, and length of coverage without having to change policies. It also offers the flexibility to convert to any form of insurance (from term to whole life, for example). The amount of premium that the policy owner can afford to spend is used to determine what type of insurance will best meet his or her needs.
For instance, a young married person with two small children and a large mortgage would undoubtedly need a large amount of life insurance. The premium that is paid could be used to purchase several hundred thousand dollars of term insurance. In later years, this same individual’s needs may have change. In planning for retirement, the same premium amount could now be used to pay for some form of whole life insurance with guaranteed cash values. The temporary protection of the term insurance is changed to permanent coverage, and the face value would be reduced based on the insured’s age and premium payment.
Universal life is a flexible premium, adjustable death benefit (face value) insurance which accumulates cash value. It was designed for people who need flexible coverage over the course of their lifetime. Premiums paid into a universal policy accumulate and, together with interest paid by the insurer, make up the policy’s cash value. Once enough cash value has accumulated, the policy owner has considerable flexibility with regard to subsequent premium payments, which may be paid, for example, directly from the cash value account of the policy.
The policy owner may choose one of two options regarding the death benefit payable under this type of policy. Option 1 provides for a level death benefit equal to the policy’s face value. As a result of this choice, more of the premium is placed in the cash account, making the cash value rise more quickly. Option 2 provides for an increasing death benefit equal to the face value of the policy plus the cash account. Cash value does not increase as quickly because more of the premium is applied to the higher cost of the increasing death benefit over the life of the policy.
Withdrawals and loans may be made against the cash value account. The policy owner can also surrender or “cash in” the universal life contract for its current cash value whenever he or she wishes.
Variable life is a securities-based whole life insurance. Agents selling variable life must have a valid life insurance license, as well as be registered with the National Association of Securities Dealers (NASD) through a Series 6 exam. Variable life is designed to protect the policy owner and beneficiaries from the erosion of their life insurance dollars due to inflation.
Premiums paid for variable life insurance are placed in a separate account consisting primarily of common stock. Thus, there is considerable risk to the policy owner’s investment. Due to this risk, variable insurance contracts are mandated by the federal government to be securities, and thus regulated by the Securities and Exchange Commission (SEC), the NASD, and other federal entities.
Federal law requires that a prospectus of the variable life product be given to prospective buyers at or before the point of sale, along with a 45-day “free-look” period. The policy owner must also be permitted to convert to a traditional whole life insurance contract within 24 months of policy issuance.
A variable life policy provides cash values which may be withdrawn or borrowed against. The policy owner may also surrender the policy for its current cash value.
There are basically two types of variable life insurance: scheduled premium variable life and flexible premium variable life. Scheduled premium variable life requires a periodic level premium to be paid to keep the policy in force. Flexible premium variable life, also known as variable universal life, provides for variable premiums. It combines the flexibility of universal life insurance with the hedge against inflation of variable life.