The photo-sharing service will also be allowed to provide information about its users to its parent company, Facebook.
Users can reportedly only opt out by deleting their accounts by a January 16, 2013 deadline.
The move enables Instagram to use members' names, text, photos and other content with marketing messages. "We may share your information as well as information from tools like cookies, log files, and device identifiers and location data with organisations that help us provide the service to you... (and) third-party advertising partners," the company said on its site.
Instagram said that its aim was to make it easier to work with Facebook.
"This means we can do things like fight spam more effectively, detect system and reliability problems more quickly, and build better features for everyone by understanding how Instagram is used," it said in a statement. The updated policy will not change how it handles photo ownership or who is able to see a user's pictures, it added. Facebook, operator of the world's largest social network with more than 1 billion users, is changing policies for its Instagram unit, which it bought in August for US$1 billion, as it looks for ways to increase revenue across its services.
However, the changes raised concerns that advertisers would be allowed to use teenagers' photos for marketing, Jeffrey Chester, executive director for the Center for Digital Democracy told Bloomberg News.
Instagram, popular with teens and young adults, reached more than 100 million users, the Facebook chief executive Mark Zuckerberg said in September.
Facebook "sees teens as a digital goldmine," said Mr Chester, whose group is focused on privacy issues. "We will be pressing the Federal Trade Commission to issue policies to protect teen privacy."
If users are younger than 18, then they "represent" that at least one parent or guardian has also agreed to content being used in marketing, according to the updated usage terms. The changes are aimed at protecting members while preventing abuse, Instagram said in a blog.
In the updated policy document, Instagram also said it may not always identify paid services or sponsored content. The company said it does not claim ownership of any content on the service, though some businesses may pay to display users' names, likeness or photos in connection with sponsored content.