What Is Variable Life Insurance?
Let me explain variable life insurance directly: it's a permanent life insurance product that includes separate accounts invested in various instruments and funds, such as stocks, bonds, equity funds, money market funds, and bond funds. You need to know that because of the investment risks involved, these policies are treated as securities contracts and are regulated under federal securities laws. That means sales professionals have to provide you with a prospectus of the available investment options before you buy.
Key Takeaways
Here's what you should remember: variable life insurance is permanent, it features separate accounts with diverse investments, it's considered a security due to risks, and it's often more expensive than alternatives like term life. Keep these points in mind as we go deeper.
How Variable Life Insurance Works
Think of variable life insurance as blending insurance with investing. The policy has tax benefits, including tax-deferred earnings accumulation. As long as the policy stays active, you can access the cash value through a tax-free loan, but remember that any unpaid loans, including interest, will cut into the death benefit. Also, if you partially or fully surrender the policy, the interest or earnings involved become taxable at distribution.
Variable Life Insurance Advantages
One key advantage is the flexibility it gives you in premium payments and cash value growth. Unlike fixed premiums in whole life or term policies, you can adjust your payments within limits to match your financial situation and goals. For instance, if you pay less than required, the cash value covers the gap, but doing this long-term could deplete your cash value and affect the policy. On the flip side, paying more boosts your cash value and investments. The death benefit ties to the performance of your chosen funds, so strong returns could mean better protection for your beneficiaries. You also get a range of investment options, from conservative to aggressive, and some top companies like Prudential and New York Life offer these plans. Just note that loan interest could become taxable if you surrender the policy.
Variable Life Insurance Disadvantages
Be aware of the downsides: variable life insurance is generally more expensive than other types, with premiums covering admin fees and investment management. You might need to increase payments to maintain the policy or a desired death benefit, depending on investment performance. Some policyholders pay extra to ensure guarantees, but you assume all investment risks—the insurer doesn't guarantee performance or protect against losses. You'll need to stay informed about your investments and monitor account performance. Like most policies, you undergo medical underwriting, so health issues could lead to denial or higher premiums.
Comparison to Term Life and Common Questions
Compared to term life, variable life is more complex and costly but offers investment potential and permanence. You might wonder why it's closer to a security than a standard policy—it's because of those separate accounts with stocks, bonds, and funds, plus the risks that make it regulated federally with required prospectuses. A main advantage is that you choose how to invest your cash value, potentially leading to higher returns than other policies through varied options.
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