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Most often, life insurance companies offer a specific amount of coverage for a set annual price, called the premium. Some policies offer an adjustable premium. With it, the policy owner can choose how much money to invest in the policy each year. The face amount, called the death benefit, and the cash value of the policy, will change based on the amount of premiums paid each year.
As the owner pays each adjustable premium, the cash value of the policy grows. If the cash value can cover the policy’s maintenance costs, the owner does not have to pay any more premiums. The cash value and the death benefit, or the amount paid out when the insured person dies, change each year based on the premiums paid into the policy.
Adjustable premium life insurance polices are often called flexible premium life insurance. Common types of adjustable premium policies include fixed and variable universal life insurance. Universal life insurance polices are designed to cover the insured person for an entire lifetime. This is unlike term insurance policies, which expire after a set term, such as 10 or 20 years.
Universal adjustable premium life insurance polices include a death benefit, plus a savings element. In a fixed policy, the premiums paid for the policy create a cash value. The insurance company pays interest on the cash value each year.
Interest rates can change each year. Most policies guarantee a minimum rate each year, such as 3%. The interest is not paid out to the policy owner. It is added to the policy’s cash value.
In a variable adjustable premium policy, the premium funds are invested into different sub-accounts. These sub-accounts mirror mutual funds and are run by professional money managers. Since these funds are subject to stock market risk, a return on investment is not guaranteed. The policy owner can also lose the principle amount invested in the policy.
A policy owner can cancel an adjustable premium life insurance policy. The insurance company will then pay the owner the cash value of the policy, minus any expense charges to date. This is called surrendering a life insurance policy.
If the policy owner stops making the adjustable premium payments, funds will be pulled from the policy’s cash value to pay the expense charges. The insurance will remain in effect until the cash value is exhausted. When the remaining cash has been used to pay the policy maintenance charges, the insurance company will close policy. In this case, the policy has lapsed.
@Scrbblchick -- I know what you mean. I started looking at the adjustable premium policies, and even though they were much more reasonably priced than the fixed premium policies, I started thinking about what I'd do for life insurance when the term expired. I didn't like the answers I came up with.
I'm going to contact my agent who has my car and home insurance and see if I can get a better rate from them. The rates I've been seeing online have not been at all encouraging. They've been downright depressing, in fact. Insurance is pricey stuff. These companies are making a killing. Maybe I'm in the wrong business.
I've been looking around for a good life insurance policy with premiums I can afford. I keep thinking the whole life, or fixed premium insurance is a better deal in a lot of ways, since it actually builds cash value. I know I'd better get some fairly quickly. I'm 46 and the value starts going up after age 50. I need it. If I had this, if I had to go to a nursing home or something, at least my husband could cash in the policy to help pay for it.
Being an adult stinks. You have to think about these kinds of things, and there's no easy way to do it -- not really.