Variable Life Insurance

There are many types of life insurance policies – something that you’ve probably already figured out in case you have been shopping for insurance policies. Unfortunately, it is not always easy to tell how these insurance types are different or if one type is better than the other type. In this post, we will take a close look at variable life insurance.

What Exactly Is Variable Life Insurance?

A variable life insurance policy is basically a type of permanent life insurance. This insurance policy provides permanent protection to the beneficiary upon the death of a policyholder. Variable life insurance is usually more expensive when compared to term insurance due to the fact that it allows the insured to allocate a certain portion of premium dollars to a separate account that’s comprised of various investment funds and instruments within the company's portfolio, such as bonds, equity funds, stocks, bond funds and money market funds.

How Does Variable Life Insurance Policy Work?

Although other policies such as universal life and whole life policies offer a fairly low return on the cash value account, an insurance policy with a variable account has the potential for much greater appreciation. Here's how a comprehensive guide on variable life insurance works: 

Each time that you make a premium payment, an insurance company deducts its administrative expenses and sales related to your insurance policy. The remaining money is then credited to the cash value account from where the insurance company deducts monthly costs for your life insurance. The cash value is then placed into an account that’s separate from the company's general account.

You can select from a wide variety of accounts referred to as sub accounts, including bond, stock, and the money market accounts, into which you can invest the cash value. You might generally allocate your cash value to as many sub-accounts as they are in a variable life insurance portfolio. In addition, you might also change the allocations at any given time without charges, up to certain set limits.

Since these sub-accounts are usually securities-based, they usually have the potential of growing faster than cash value accounts contained in other insurance policies. However, with this great potential for fast growth comes the possibility of loss and greater volatility. Growth isn’t guaranteed, and your money will fluctuate on a day-to-day basis. You will have to pay close attention to performances of your sub-accounts and might wish to consult investment professionals. You should also receive a prospectus since the cash value of your insurance policy is normally regulated by the Securities and Exchange Commission as an investment product. The prospectus generally contains detailed information on investment objectives, charges, expenses, and risks. As such, you should read it carefully before buying a variable life insurance policy.

Alternatives To Variable Life Insurance

1. Term life insurance: This insurance policy is a simpler and cheaper alternative to the permanent life insurance policies such as variable life insurance. Unlike the permanent life insurance policies, this policy ends after a certain number of years and doesn’t feature any sort of investment or savings component.

2. Other permanent life insurance. Apart from variable life insurance policy, there are 3 other forms of permanent life insurance policy: whole life insurance, variable universal life insurance, and universal life insurance. How are these types different from one another? The key here is the cash value; each policy takes a very different approach to growing the cash value. However, the other details are quite similar.

What’s Good About The Variable Life Insurance?

· Variable life insurance policy lasts for your whole lifetime. Provided that you keep on paying the premiums, your insurance policy will always stay in force and offer a death benefit to your survivors.

· Growth is tax-deferred. Also known as “super-IRA,” this insurance policy grows tax-deferred. This simply means that your annual growth does not have to be reported to IRS. In case your cash value is distributed as the death benefit (instead of being withdrawn before you die), your beneficiaries won’t have to pay any taxes on it.

· It normally has a high rate of growth as compared to whole life insurance. Whereas a whole life insurance policy’s cash value is usually guaranteed to grow a given certain amount, it is smaller when compared to the potential growth of variable life insurance policies.

What’s Bad About The Variable Life Insurance?

· It is significantly more expensive as compared to term life insurance. When paying your premiums for this type of insurance policy, not only will you be paying for life insurance policy, but you will also be paying to put some money into your cash value as well.

· Your premiums might rise if the cash value performs badly. In the event that your investments are not doing well, then your insurance company might raise the premiums so as to inject new capital to your sub-accounts.

· High management fees. Every sub-accounts bears its own management fees, in the same way that a mutual fund has its own fees. However, the fees on your sub-accounts are generally higher than those that you would find on mutual funds.

Since variable life insurance policy contains portfolios holding bonds, stocks and several other investment instruments, they’re usually regulated as securities. As such, insurance professionals who sell this insurance policy must be registered with your state's insurance division as well as the National Association of Securities Dealers.