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.