What Is Adjustable Life Insurance?

Adjustable life insurance is a hybrid of term life and whole life insurance that allows policyholders the option to adjust policy features, including the period of protection, face amount, premiums, and length of the premium payment period.

Adjustable life policies also incorporate an interest-bearing savings component, known as a “cash value” account.

Understanding Adjustable Life Insurance

Adjustable life insurance differs from other life insurance products in that there is no requirement to cancel or purchase additional policies as the insured’s circumstances change. It is attractive to those who want the protection and cash value benefits of permanent life insurance yet need or want some flexibility with policy features.

Using the ability to modify premium payments and face amounts, policyholders may customize their coverage as their lives change. For example, a policyholder may want to increase the face amount upon getting married and having children. An unemployed person may want to reduce premiums to accommodate a restricted budget.

As with other permanent life insurance, adjustable life insurance has a savings component that earns cash value interest, usually at a guaranteed rate. Policyholders are permitted to make changes to critical features of their policy within limits. They may increase or decrease the premium, increase or decrease the face amount, extend or shorten the guaranteed protection period, and extend or shorten the premium payment period.

Adjustments to the policy will alter the guaranteed period of the interest rate, and changes in the length of the guarantee will change the cash value schedule. Decreasing the face amount is done upon request or in writing. However, increasing the face amount may require additional underwriting, with substantial increases requiring full medical underwriting.

Factors That Can Be Adjusted

Three factors can be changed in an adjustable life insurance policy. These are the premium, cash value, and death benefit. All three elements can be adjusted because this policy is a permanent life insurance policy and does not expire, like a term life policy.

Premiums can be changed by frequency or amount of payments, as long as you pay above the minimum cost. The policy’s cash value can be increased by upping your premium payments. You can decrease your cash amount if you withdraw funds or use the cash in the policy to pay the premiums.

Finally, you can adjust your death benefit by decreasing or adding to the amount. If you decide to add a significant amount to the death benefit due to a life event like the birth of a child, your premiums may go up based on the new benefit amount. In some cases, your policy will have to undergo additional underwriting.

Advantages and Disadvantages of Adjustable Life Insurance

Adjustable life insurance gives policyholders more flexibility than term life insurance, but it is more expensive than a simple 20- or 30-year term policy. If you plan on using adjustable life insurance as an investment vehicle, you may be better off with a tool that earns more interest. Adjustable life insurance only provides modest amounts of interest growth.

Guidelines for Life Insurance Policies and Riders

Internal Revenue Code (IRC) Section 7702 defines the characteristics of and guidelines for life insurance policies. Subsection C of this section provides guidelines for premium payments. The policyholder may not adjust the premiums in a manner that violates these guidelines. Increasing premiums may also increase the face amount to the point that it requires evidence of insurability.

However, many life insurers set parameters to prevent violations. Adjustable life insurance policies typically have optional riders. Familiar ones include the waiver of premium and accidental death and dismemberment riders.

The Bottom Line

Adjustable life policies provide the flexibility that most traditional policies do not. However, the frequency of allowable adjustments is restricted within set time frames. Requests must be made within an allotted period and meet the guidelines set by the insurer.

The variability in adjustments can create a policy that mirrors either term life insurance or whole life insurance. Effectively, adjustable life insurance policies allow policyholders to customize their life insurance to meet current or anticipated needs.

As with any kind of permanent policy, it’s critical to research every firm that’s being considered to ensure that they’re among the best life insurance companies currently operating.

What Is an Adhesion Contract?

An adhesion contract is an agreement where one party has substantially more power than the other in setting the terms of the contract. For a contract of adhesion to exist, the offeror must supply a customer with standard terms and conditions that are identical to those offered to other customers. Those terms and conditions are non-negotiable, meaning the weaker party in the contract must agree to the contract as it is rather than requesting clauses be added, removed, or changed. Adhesion contracts may also be referred to as boilerplate contracts or standard contracts.

Understanding Adhesion Contracts

Adhesion contracts are often used for insurance, leases, vehicle purchases, mortgages, and other transactions where there will be a high volume of customers who will all fall under some standard form of agreement. In an insurance contract, the company and its agent have the power to draft the contract, while the potential policyholder only has the right of refusal; the customer cannot counter the offer or create a new contract to which the insurer can agree. It is important to read over an adhesion contract carefully, as all the information and rules have been written by the other party.

Adhesion contracts are usually enforceable in the United States thanks to the Uniform Commercial Code (UCC). The UCC helps to ensure that commercial transactions are taking place under a similar set of laws across the country. Although the UCC is followed by most American states, it has not been fully adopted by some jurisdictions like American Samoa and Puerto Rico. Louisiana stands alone among the 50 states in that it has only adopted parts of the UCC. The UCC has specific provisions relating to adhesion contracts for the sale or lease of goods. Contracts of adhesion are, however, subject additional scrutiny and interpretation under state law.

History of Adhesion Contracts

Adhesion contracts originated as a concept in French civil law, but did not enter American jurisprudence until the Harvard Law Review published an influential article on the subject by Edwin W. Patterson in 1919. Subsequently, most American courts adopted the concept, helped in large part by a Supreme Court of California case that endorsed adhesion analysis in 1962. 

As with most aspects of contract law, the legality and enforceability of adhesion contracts has been formed over time. The case law and interpretation may vary from state to state, but it is generally agreed that adhesion contracts are an efficient way to handle standardized transactions. Using adhesion contracts saves companies and customers time and money in terms of legal counsel when they are done properly. However, the law around adhesion contracts is always evolving. For example, digital adhesion contracts signed online have been challenged in court for burying clauses or making it difficult to read certain clauses, so a digital adhesion contract must now be as close to a paper contract as possible.

Enforceability of Adhesion Contracts

For a contract to be treated as an adhesion contract, it must be presented as a “take it or leave it” deal, giving one party no ability to negotiate because of their unequal bargaining position. Adhesion contracts are subject to scrutiny, though, and that scrutiny usually comes in one of two forms.

Courts have traditionally used the doctrine of reasonable expectations to test whether an adhesion contract is enforceable. Under this doctrine, specific parts of an adhesion contract or the whole contract may be deemed unenforceable if the contract terms go beyond what the weaker party would have reasonably expected. Whether a contract is reasonable in its expectations depends on the prominence of the terms, the purpose of the terms, and the circumstances surrounding acceptance of the contract.

The doctrine of unconscionability has also been used in contract law to challenge certain adhesion contracts. Unconscionability is a fact-specific doctrine arising from the same equitable principles—specifically the idea of bargaining in good faith. Unconscionability in adhesion contracts usually comes up if there is an absence of meaningful choice on the part of one party due to one-sided contract provisions combined with unreasonably oppressive terms that no one would or should accept. Simply put, if the contract is exceptionally unfair to the signing party, it can be declared unenforceable in court.

The doctrine of unconscionability shifts the focus from what the customer might reasonably expect to the motive of the supplier. Unconscionability is easier to argue if the supplier is making a significant profit from the agreement, especially if the amount of profit is in some way tied to the weaker party’s lack of bargaining power. Some legal experts have pushed back on this approach as it has implications in terms of the freedom of contract—the legal concept that people can freely determine the provisions of a contract without government interference.

What Is an Available Balance?

The available balance is the balance in checking or on-demand accounts that is free for use by the customer or account holder. These are funds that are available for immediate use, and includes deposits, withdrawals, transfers, and any other activity that has already cleared to or from the account. A credit card account’s available balance is normally referred to as available credit.

An account holder’s available balance may be different from the current balance. The current balance generally includes any pending transactions that haven’t been cleared.

Understanding Available Balance

As noted above, the available balance represents the funds available for immediate use in a customer’s account. This balance is updated continuously throughout the day. Any activity that takes place in the account—whether that’s a transaction done through the teller, an automated teller machine (ATM), at a store, or online—affects this balance. It does not include any pending transactions that have yet to clear.

When you log into your online banking portal, you will normally see two balances at the top: The available balance and the current balance. The current balance is what you have in your account all the time. This figure includes any transactions that have not cleared such as checks.

Depending on both the issuing bank and the receiving bank’s policies, check deposits may take anywhere from one to two days to clear. This process may take much longer if the check is drawn on a non-bank or foreign institution. The time between when a check is deposited and when it is available is often called the float time.

A customer’s available balance becomes important when there is a delay in crediting funds to an account. If an issuing bank has not cleared a check deposit, for example, the funds will not be available to the account holder, even though they may show up in the account’s current balance.

Using the Available Balance

Customers can use the available balance in any way they choose, as long as they don’t exceed the limit. They should also take into consideration any pending transactions that haven’t been added or deducted from the balance. A customer may be able to withdraw funds, write checks, do a transfer, or even make a purchase with their debit card up to the available balance.

For example, your bank account balance can be $1,500, but your available balance may only be $1,000. That extra $500 may be due to a pending transfer to another account for $350, an online purchase you made for $100, a check you deposited for $400 that hasn’t cleared yet because the bank put it on hold, and a pre-authorized payment for your car insurance for $450. You can use any amount up to $1,000 without incurring any extra fees or charges from your bank. If you go beyond that, you may go into overdraft, and there may be issues with the pending transactions.

Available Balance and Check Holds

Banks may decide to place holds on checks under the following circumstances, which affect your available balance:

• If the check is above $5,000, the bank can place a hold on whatever amount exceeds $5,000. However, said amount must be made available within a reasonable time, usually two to five business days.
• Banks may hold checks from accounts that are repeatedly overdrawn. This includes accounts with a negative balance on six or more banking days in the most recent six-month period and account balances that were negative by $5,000 or more two times in the most recent six-month period.
• If a bank has reasonable cause to doubt the collectibility of a check, it can place a hold. This can occur in some instances of postdated checks, checks dated six (or more) months prior, and checks that the paying institution deemed it will not honor. Banks must provide notice to customers of doubtful collectibility.
• A bank may hold checks deposited during emergency conditions, such as natural disasters, communications malfunctions, or acts of terrorism. A bank may hold such checks until conditions permit it to provide the available funds.
• Banks may hold deposits into the accounts of new customers, who are defined as those who have held their accounts for less than 30 days. Banks may choose an availability schedule for new customers.

Banks may not hold cash or electronic payments, along with the first $5,000 of traditional checks that are not in question. On July 1, 2018, new amendments to Regulation CC—Availability of Funds and Collection of Checks—issued by the Federal Reserve took effect to address the new environment of electronic check collection and processing systems, including rules about remote deposit capture and warranties for electronic checks and electronic returned checks.

Special Considerations

There are cases that can affect your account balance—both negatively and positively—and how you can use it. Electronic banking makes our lives easier, allowing us to schedule payments and allow for direct deposits at regular intervals. Remember to keep track of all your pre-authorized payments—especially if you have multiple payments coming out at different times every month. And if your employer offers direct deposit, take advantage of it. Not only does it save you a trip to the bank every payday, but it also means you can use your pay right away.

What Is a 408(k) Plan?

The term 408(k) account refers to an employer-sponsored retirement savings plan. A 408(k) plan allows employees to put aside pretax dollars for retirement that grow on a tax-deferred basis, making it a type of individual retirement account (IRA). This means that individuals pay taxes when they make withdrawals after they turn 59½. The 408(k) is commonly referred to as a simplified employee pension (SEP) plan. In fact, it is the SEP version of the popular 401(k) plan.

Understanding 408(k) Plans

Section 408(k) of the Internal Revenue Code (IRC) outlines the rules and regulations associated with SEP and salary reduction simplified employee pension (SARSEP) accounts, notably individual retirement accounts (IRAs) or individual retirement annuities. That is why SEP plans are often referred to as 408(k) plans.

The IRC highlights the requirements needed in order to participate in a 408(k) plan. Plans are available to small businesses of any size and to self-employed individuals. Participants qualify if they are:

• Over the age of 21
• Worked for at least three of the last five years for the employer
• Were compensated at least $650 by the employer (for 2022; compensation requirements increase to $750 for 2023)

Annual employer contributions cannot exceed the lesser of 25% of the employee’s pay or $61,000 for 2022 ($66,000 for 2023). The annual compensation limit cannot be calculated on incomes exceeding $305,000 for 2022 ($330,000 in 2023). The maximum deduction claimed on a business tax return for contributions is the lesser of the total contributions into employees’ accounts or 25% of compensation.

Plan holders can make withdrawals from their 408(k) plans at any time—the same way they would from traditional IRAs. But there are certain conditions that apply. For instance, most individuals make withdrawals after they turn 59½. Any distributions from these plans before that age incur a 10% early withdrawal penalty. Withdrawals must be made as required minimum distributions (RMDs) as of April 1 the year after you turn 72 if you were that age on or before Dec. 31, 2022. You must begin taking RMDs if you turn 73 on or after Jan. 1, 2023.

408(k) Plans vs. 401(k) Plans

As noted above, a 408(k) is one type of employer-sponsored retirement plan. The 401(k) plan is the most common option and is offered by the vast majority of American corporations. The plan allows taxpayers to make pre-tax contributions through automatic payroll deductions and employer matches for those that make them.

Plan reform has made several changes to benefit employees, including lower fees and investment options. The average 401(k) plan now offers nearly two dozen investment options by balancing risk and reward, in accordance with an employee’s preferences. Unlike an SEP, employees may contribute to a 401(k) plan. And self-employed individuals who work for a company with a 401(k) can contribute to that plan, too.

Participation in traditional 401(k) plans continues to grow. These plans held roughly $7.7 trillion in assets by the end of 2021, which represented about one-fifth of the retirement market in the United States. There were 600,000 active plans in the country with a total of 60 million employees and retirees at the end of September 2021.

Here are a few other facts related to the 401(k) that taxpayers should know:

• Contribution limits for 401(k) plans are indexed to inflation. The Internal Revenue Service (IRS) allows employees to save up to $20,500 for 2022 and $22,500 for 2023. Catch-up contributions of $6,500 per year (increasing to $7,500 in 2023) are also allowed for people 50 or older.
• Withdrawals before the age of 59½ often result in a 10% early withdrawal penalty, unless an exemption is applied. Taxes are imposed on any withdrawals made as contributions are made with pretax earnings.
• Individuals who turn 72 between Jan. 1, 2020, and Dec. 31, 2022, must begin taking RMDs the following April 1. The SECURE ACT 2.0 raised that age to 73 for anyone who turned that age on or after Jan. 1, 2023.

Correction—Jan. 27, 2023: A previous version of this article misstated that 408(k) plans are available to companies with 25 employees or less. It was corrected to state that plans are open to companies of any size.