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What Is Variable Life Insurance?
Article 12 of 14 in How to Find the Best Type of Life Insurance
Variable life insurance is a type of permanent life insurance policy that has an investment account attached to it. Part of your premium payments will be used to establish the value of your policy, and the rest will be invested across mutual funds, stocks, or bonds that you can choose. Variable life insurance policies can be a good way to provide your family with financial protection after you die and manage your money while you're alive, but they can be risky and complicated to understand.
Always consult an experienced life insurance agent or financial planner before you purchase variable life insurance.
Components of Variable Life
Like a universal life policy, a variable life policy allows a person to have a permanent death benefit and an investment savings option all in one. Each of the components is important to understand:
- The Insurance: The insurance is permanent insurance, means it will not expire after a certain term or time. Your beneficiaries will collect the accrued value upon your death. The value of the death benefit can fluctuate, but not below a certain point.
- The Investment: The investment account grows tax deferred. This tax advantage makes it an attractive option for high income earning individuals helping with the management of estate taxes. You will typically have the option of taking out a policy loan against the value of the account, so it can be used in financial emergencies or as a savings tool for educational expense as variable life policies are not considered when applying for any type of financial aid.
The Value of Your Variable Policy
It is important to note that the value of the death benefit and the cash fund will fluctuate according to the market performance. Most variable life policies come with a guaranteed minimum death benefit, ensuring that your death benefit will not fall below a certain amount. However, the cash accumulation that you invest usually does not have this type of protection, and is subject to the risks of the market. Like other life insurance policies with an investment component, caution should be taken before obtaining these types of policies.
TIP: Talk with an insurance agent that is trained in securities and investments or a financial advisor before you buy variable insurance to have your questions and concerns answered.
Pros and Cons of Variable Life
If you are considering a variable life insurance plan, you will need to weigh the pros and cons of such a policy. On the upside:
- The flexibility of this policy allows a person to pay premium monthly or pay more than the premium to bill up the investment account quicker
- Eventually you may not have to pay a premium at all, instead deducting the amount from the investment account.
- The growth potential of the death benefit is enormous if the investment portfolio does well. This allows for unlimited potential to pass wealth to your beneficiaries.
And on the downside:
- If the stock market has a down turn your investment portfolio will have a down turn as well. This could cause your death benefit to plummet or you can run out of coverage altogether.
- Variable rights might be higher than the rates for a term life insurance plan. You may be able to get a cheaper policy, and invest the difference in rate costs to get a better return than you would from your variable life investments. Compare a variable plan to a term plan before you make a purchase decision.
Speak with a reputable agent who understands securities and investments before you purchase a variable life insurance plan. An insurance agent or investment advisor can conduct an insurance needs analysis to determine if this type of policy will fit your needs and goals. You should never get this type of insurance without a full understanding of its risk and potential. To get a quote or to talk with an agent today about a Variable Life Insurance Policy, click here.
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