Index | Life Insurance | Variable Life Insurance
Variable Life Insurance
Variable Life Insurance is a special type of a Permanent Life Insurance policy in which both the death benefit and the cash value depend on the investment performance of the underlying assets, usually one or two investment accounts known as "separate accounts" (or "sub-accounts") within the insurance company's portfolio. Sub-accounts are organized as special trusts for the benefit of the insured which are kept separate from the general account of the insurance company.
Thus, this type of Life Insurance allows you to participate in several investment options simultaneously targeting your premiums to separate accounts. The number and types of the available choices depend on the insurance company and therefore can vary. Generally, the optional investment funds include stocks, bonds, money market funds, equity funds, bond funds or a combination of them. Variable Life Insurance contracts normally make provisions for you to be able to switch from one sub-account to another. Besides, in addition to the variable investment options, many insurance companies also offer a fixed interest account providing a guaranteed rate for a specific period of time.
Being a Permanent Life Insurance plan, Variable Life Insurance accumulates cash value and allows minimizing income tax exposure during lifetime and upon the insured's death. At the same time Variable Life policies have marked differences from other permanent plans which deserve your attention. Thus, Variable Life Insurance enables you to control the investment of your cash value, unlike Universal Life Insurance, which does not. Variable Life Insurance has a greater growth potential than the rates under Whole Life Insurance.
An indisputable advantage of Variable Life policies is that the cash value accumulates on a tax-deferred basis unless you decide to surrender the policy. Though usually a special provision is stipulated in the contracts of this type according to which you cannot withdraw your cash value during your lifetime.
Ideally, Variable Life Insurance requires expert knowledge of the market situation and investment procedures to make a profit. Alongside the offered flexibility, this Life Insurance plan is fraught with losses if the investments you make do not prove to be profitable. As stated above, with a Variable Life policy, the death benefit and the cash value are mutually dependent and vary in relation to the value of the investments underlying the policy. If the value of the accounts increases, so do the benefits; if the value of the account decreases, so do the benefits. As neither the cash value nor the death benefit is predetermined or guaranteed, the policyholder bears the risk of a poor fund performance which results in the decreased amount of the death benefit and the cash value and the increased premiums the insured has to pay to keep the policy in effect.
Generally, the death benefit is subject to a specified minimum limit and does not fall below it. Some companies allow the policyholder to pay an extra premium to be liable to a guaranteed death benefit. When it comes to premium payments, there is another convenient option sometimes offered under Variable Life contracts - a policy with a fixed premium, which justifies the feature of flexibility attributed to Variable Life Insurance.
One more detail deserving your attention is that with Variable Life insurance you cannot increase or decrease the face amount of your policy. Any additional coverage you may be interested in entails purchasing another policy and, therefore, additional expenses and sometimes evidence of insurability.
Variable Life Insurance is fraught with more risks for the policyholder than any other types of insurance with a buildup of cash value feature because both the cash value and the amount of the death benefit may fluctuate up or down depending on the performance of the investment funds selected by the policyholder to underlie the policy. Due to inherent investment risks, Variable Life policies are deemed securities contracts and are regulated under the federal securities laws. That is why they are normally sold with a prospectus that details the policy's investment objectives, charges, risks, fees, and other expenses.
Together with the risks involved, Variable Life Insurance offers an opportunity of greater returns. If the cash value amount exceeds a fixed threshold, the death benefit will automatically increase. Moreover, with a Variable Life Insurance policy you can redirect the earned interest toward the premiums thus decreasing your expenses needed to cover the cost of the policy.
On average, Variable Life policies are more expensive than the majority of Life Insurance policies. However, they give more control and flexibility with a potential of making large profits and leaving lump sums to the beneficiaries.
Before purchasing a Variable Life policy you must be aware of the risks involved in investing. It is recommended to acquaint yourself with the basic investment principles. If you have a good sense of the market and are well aware of the investment funds and operations, then Variable Life Insurance is truly for you and your reasonable investments will allow you to achieve sizeable investment profits for your beneficiaries. Otherwise, it is advisable to have a professional investment manager, a financial or tax advisor who will supervise your investments, advise you on preferable investment decisions specific to your circumstances and help you decrease investment risks involved, if not eliminate them altogether.