Flexible Policies

To some, level premiums, level face amounts, and fixed benefits imply stability and safety. But for others, these same features reflect inflexibility and missed opportunities. This is particularly true when an individual's insurance needs are changing or there are significant changes in economic conditions. In recent decades several new types of life insurance products have been developed and introduced to satisfy consumer demands for more flexibility in terms of premiums, face amounts and investment objectives. 29 The main types of flexible policies available include adjustable life, universal life and variable life insurance.

Flexible life insurance products provide consumers with a wider range of options than traditional policies. Although these policies provide flexibility, they also pose a degree of uncertainty and increased risk. On the investment side, there is no guarantee that these products will perform better than alternative products. On the protection side, some flexible policies do not guarantee the amount of the death benefit, so there is a risk that an insured who is seeking a better return will actually end up with less protection than is needed.

Advantages of Flexible Policies

Flexible life insurance products offer the following advantages:

1. The convenience of making policy changes without exchanging policies.
2. The flexibility to change the premium payment or face amount as needs change.
3. An opportunity to earn higher rates of interest than are available under fixed-return contracts.
4. Investment returns under variable policies may exceed the fixed returns under guaranteed contracts.

Disadvantages of Flexible Policies

Some of the potential disadvantages of flexible life insurance policies are:

1. Proof of insurability may be required when an insured increases the face amount.
2. Policy changes which increase the death benefit could require substantially higher premium payments.
3. Making many policy changes could cause an insured to lose focus of the overall financial planning goals.
4. Flexible products were introduced during a period of historically high interest rates, and returns in recent years have fallen far below initial expectations.
5. The investment element in variable products is not guaranteed, and in many cases there is no guarantee of the amount of the death benefit.

SECTION V- Adjustable Life Insurance

Adjustable life insurance allows a policyowner to make changes in the face amount, amount of premium payments, the length of protection, and the type of protection being provided. Adjustments may be made to the basic features of the life insurance policy, but this contract does not offer flexible interest rates or equity investments.

All of these changes may be made without having to complete a new application, drop or exchange any policies, or even have a new policy issued.

The flexibility of adjustable life is accomplished by allowing conversion from one form of insurance to another, and by making appropriate premium adjustments, if necessary. Whenever an adjustment in coverage is made which increases the amount of the death benefit, proof of insurability may be required before the additional coverage amount is approved.

Universal Life Insurance

Universal life is permanent life insurance, it can serve the needs of individuals and businesses just as whole life has done for many years. However, the flexibility of universal life adds a new dimension to fitting the coverage to the changing needs of the insured.

Our financial climate has changed, and life insurance has had to change with it, in large part because of the intense competition for the dollars available for investment. As inflation and interest rates soared, some financial writers suggested that life insurance buyers purchase low-cost term insurance and put their savings where the return was better. They suggested that the client separate the protection and savings elements of a cash value policy: "Buy term and invest the difference!"

The concept of universal life insurance developed in the late 1970s from the idea that the two components of a whole life policy's death benefit - the pure protection and the cash value-could be formally separated, giving the policyowner greater control over the funding of the cash value.

Universal life policies enjoyed a surge of success during the mid 1980s when high interest rates were widely available. Sales of universal life products grew at the expense of whole life sales. Since that time, interest rates have dropped dramatically, and universal life sales have fallen while whole life sales recovered much of their former market share.