Variable Life: Insurance Or Investment?

Variable life insurance is a type of permanent life insurance policy that lasts for the entirety of the policyholder's life, as long as premiums are paid. It combines a death benefit with a cash value account that can be invested in stocks, bonds, mutual funds, or other types of securities. The cash value account provides the opportunity for investment gains but also carries the risk of investment losses. Variable life insurance policies tend to have higher premiums and more complex fee structures compared to other types of life insurance. These policies are designed for individuals who want more control over their investments and are comfortable with adding stock market risk to their life insurance.

Variable life insurance: permanent protection

Variable life insurance is a type of permanent life insurance policy, meaning it provides coverage for the policyholder's lifetime as long as premiums are paid. It combines a death benefit with a cash-value account that is invested in various funds, usually mutual funds.

The money from the insurance premium is used for account maintenance and fees, the death benefit, and the policy's cash value. The death benefit is the amount paid to beneficiaries when the policyholder dies. The cash value component is essentially an investment account that the policyholder can choose how to invest. The cash value can be invested in numerous ways, but the most common way is to invest in mutual funds. You may also be able to invest in index funds, equities, bonds, or money market funds.

If your cash value investment does well, you have several options. You can use the money to increase the death benefit, withdraw the money as cash, or use the funds as collateral for a loan. However, most insurance companies put a cap on the maximum rate of return, so your earning potential isn't endless. You'll also have to pay management fees based on how your cash value is invested.

Variable life insurance policies are considered more volatile than standard life insurance policies and carry more risk. The major risk is that your investments can lose money, and unlike with other types of insurance policies, the insurance company does not guarantee a rate of return.

Variable life insurance policies may have significant benefits, including financial protection for your family, a potentially increased death benefit, and flexibility and choice. However, potential downsides include high premiums, capped returns, and limited investment options.

Variable life insurance: fixed death benefit

Variable life insurance is a type of permanent life insurance policy, which means that it provides coverage for the policyholder's entire life, as opposed to a set number of years. It combines a death benefit with an investment component, which is often invested in mutual funds.

The death benefit is a fixed amount paid out to the policyholder's beneficiaries upon their death. This benefit is guaranteed and constant, and is separate from the investment component, which may increase or decrease depending on market performance.

The investment component of variable life insurance is often referred to as the cash value. The cash value can be invested in a variety of securities, including mutual funds, index funds, equities, bonds, and money market funds. The policyholder can choose how to allocate their funds across these different investment options.

The cash value of a variable life insurance policy can be used in several ways. Firstly, it can be used to increase the death benefit, resulting in a higher payout for the policyholder's beneficiaries. Secondly, it can be withdrawn as cash by the policyholder. Finally, it can be used as collateral for a loan.

While variable life insurance offers the potential for significant gains, it is also one of the riskier types of life insurance. The policyholder bears the risk of investment losses, as the insurance company typically does not guarantee a rate of return or offer protection against investment losses. Therefore, the cash value of a variable life insurance policy can either appreciate or depreciate, depending on the performance of the market.

Variable life insurance: cash value account

Variable life insurance is a permanent life insurance policy with an investment component. It has a cash-value account that is invested, typically in mutual funds, but also in other securities. The cash value can be invested in certain securities (often called subaccounts), which resemble mutual funds. The cash value can also be invested in index funds, equities, bonds or money market funds.

The value of the cash account may rise or fall depending on market performance, so these policies carry more risk compared to other life insurance policies. However, you can allocate a portion of your premium to a fixed account, which guarantees a rate of return, to reduce overall risk. The rate on this fixed account may change annually, but there is typically a guaranteed minimum, such as 3%.

The cash value of a variable life insurance policy can be used in several ways. If it performs well, it can be used to increase the death benefit, withdrawn as cash, or used as collateral for a loan. The cash value is also the amount of money you would receive if you decided to surrender your coverage to the insurer.

Variable life insurance policies tend to have high fees, including mortality and expense risk charges, sales and administrative fees, and investment management fees. There are also fees for withdrawing money from the policy's cash value.

Variable life insurance: pros and cons

Variable life insurance is a permanent life insurance policy with an investment component. The policy has a cash-value account that is invested, typically in mutual funds. This means that the policyholder can direct how the cash value of their policy is invested. The value of the cash account can therefore rise or fall depending on the performance of the underlying securities.

Pros

Variable life insurance offers the following advantages:

• The ability to direct how the cash value of the policy is invested
• The potential for higher returns than other types of permanent life insurance
• Flexible premium payment options
• A death benefit that won't decrease as long as minimum premium payments are maintained
• The potential to use the cash value to pay premiums
• The potential for tax advantages

Cons

Variable life insurance also has several drawbacks:

• Complexity and the need for hands-on attention
• Higher fees and premiums than other types of life insurance
• The risk of losing money if investments perform poorly
• A long-term commitment is required

Variable life insurance: alternatives

Variable life insurance is not the only life insurance option available. Here are some alternatives:

Term life insurance

Term life insurance offers coverage over a set period of time, usually 10, 15, 20, 25, or 30 years. If you pass away during the term, your beneficiary receives the death benefit. If you outlive the term, your coverage ends. Term life insurance may be beneficial if you only need coverage for a certain period or if you want a cheaper premium. Term life insurance does not generate cash value, unlike variable life insurance.

Whole life insurance

Whole life insurance is designed to last your entire life and has a fixed death benefit, level premiums, and provides a cash value account that can grow over time, tax-deferred. You may withdraw or borrow the cash value while still alive and use the money for any purpose. However, pulling money from the cash value can lower the death benefit, and the cash value does not add to it.

Universal life insurance

Universal life insurance is also a permanent policy, meaning it covers you for the rest of your life. This policy builds cash value, which grows based on an interest rate tied to the stock market. You can use your cash value to change the frequency and/or amount of your premiums, and you can also adjust the death benefit if your family's financial needs change over time.

Guaranteed life insurance

Guaranteed life insurance is a type of whole life insurance that does not require a health exam, making it a good option for those with significant health concerns. However, guaranteed life insurance policies usually have higher premiums, and the death benefit amounts are typically lower.

Final expense insurance

Final expense insurance is meant to finance funeral costs and other end-of-life expenses, protecting your loved ones from having to worry about these costs while grieving. Final expense insurance is guaranteed, meaning you don't need to take a medical exam to get approved, but the premiums are generally expensive despite the small amount of coverage (usually capped at $50,000 or less).

Frequently asked questions