Flexible premium adjustable life insurance is a type of whole life insurance policy that offers individuals the greatest amount of flexibility in terms of their investment choice and monthly premiums. It provides both a death benefit and an investment vehicle. Many individuals opt for such a policy because it provides a form of forced savings for retirement, while also protecting dependents in the event of premature death.
The first key to understanding this type of insurance is understanding whole life insurance policies. Whole life policies are distinct from term life because the death benefit on a whole life policy is paid no matter when the insured dies. With term policies, the death benefit is paid only during a set period; for example, for his beneficiaries to collect the death benefit on a 30-year term, the insured would have to die within the 30-year period that the policy was active.
With a whole life policy, premium payments continue for life and the death benefit is paid no matter when the insured dies. Premiums for this type of policy are generally more expensive than those for a term policy. They are also more expensive because the insured pays another fee, over and above the cost of insurance, which is invested in various types of investment vehicles.
The payments are invested in one of two ways: the investor
may have control over the investments and receive a variable rate of return, or he may have no control over the investment and receive a fixed rate of return. In other words, an investor with a variable policy pays extra premiums that are invested, and then gets to direct the course of that investment, ideally growing his policy, and the amount he is eventually paid. An investor with a fixed rate policy, on the other hand, pays extra premiums in and earns a fixed rate of return, while the insurance company invests those premiums.
A flexible premium adjustable life insurance policy is an alternative fixed rate policy that gives investors greater freedom. Instead of paying the same premiums every month, the insured can choose to pay within a range. The amount he pays in ultimately affects how much income he will earn from the life insurance policy.
He also has discretion to direct the investment of his money within the terms of the policy. The money eventually paid out to him in the form of withdrawals or dividends fluctuates based both on how much he paid on a monthly basis and based on how well his investments perform. Some policies may contain a guaranteed minimum rate of return when a policy is purchased, as long as a minimum amount of premiums are paid.