Variable Vs Fixed Rate Life Insurance: Which Is Superior?

Variable life insurance is a type of permanent life insurance policy that offers a guaranteed death benefit and an investment component. The cash value of a variable life insurance policy can be invested in securities, such as mutual funds, offering the potential for greater returns than other types of permanent life insurance. However, it is essential to note that variable life insurance policies come with higher fees and investment risks. On the other hand, fixed-rate life insurance policies offer stability and predictability, as the premiums remain constant throughout the policy's duration. This type of policy may be more suitable for individuals who prefer a guaranteed death benefit without the complexities of investment risk.

Variable life insurance vs. whole life insurance

Variable life insurance and whole life insurance are both permanent life insurance policies, meaning they are designed to last for the entirety of the policyholder's life. However, there are several key differences between the two types of policies.

Variable Life Insurance

Variable life insurance policies include a death benefit and a cash value component. The cash value comes from a part of the premiums and is invested in a stock market fund, usually mutual funds, managed by the insurance company or a company hired by them. The policyholder can choose how the money is invested and has several investment options, depending on the insurance company. The cash value can be used to increase the death benefit, withdrawn as cash, or used as collateral for a loan. Variable life insurance policies are flexible and provide the opportunity for the cash value to grow over time. However, they are also considered risky as there is no guaranteed rate of return, and the policyholder is responsible for any investment losses. Variable life insurance policies also tend to have higher premiums and fees than other types of life insurance.

Whole Life Insurance

Whole life insurance provides coverage for the insured's entire life and offers a guaranteed death benefit. It also includes a cash value component that builds up over time and can be accessed or borrowed against by the policyholder. Whole life insurance policies have fixed premiums, which means the policyholder pays a consistent amount for each premium payment. The cash value grows tax-deferred, and the policyholder can choose to receive any dividends as a cash payment or use them to offset the cost of the premium. Whole life insurance is a popular choice for individuals who want the assurance of a guaranteed death benefit and the ability to build up cash value over time. However, whole life insurance policies are generally more expensive than term life insurance.

Variable life insurance offers more flexibility and upside potential than whole life insurance. It allows policyholders to choose their investments and has the potential for higher returns. On the other hand, whole life insurance offers more guarantees, including a fixed premium, a guaranteed death benefit, and guaranteed returns. Whole life insurance is also less risky and has lower fees than variable life insurance. Variable life insurance is suitable for individuals who are comfortable with financial risks and want more flexibility and control over their investments. In contrast, whole life insurance is a better option for those who prefer stability and guaranteed benefits.

Variable life insurance vs. term life insurance

Variable life insurance and term life insurance are two very different types of insurance policies. Term life insurance is a pure insurance product that provides coverage for a specific term, usually between 10 and 30 years. It is designed to give beneficiaries a payout if the insured person passes away during the term. On the other hand, variable life insurance is a permanent life insurance product that provides coverage for the entire life of the insured person, as long as premiums are paid.

Variable life insurance policies have a higher potential for earning cash compared to traditional policies because they include a cash value component that can be invested. The cash value comes from a portion of the premiums paid and is typically invested in mutual funds or other securities. This gives policyholders the opportunity for significant gains but also comes with the risk of investment losses. In contrast, term life insurance does not have an investment component, so there is no opportunity for cash value accumulation.

Another key difference between variable and term life insurance is the flexibility of premiums. Variable life insurance policies offer flexible premiums, allowing policyholders to adjust their payments within certain limits. In contrast, term life insurance policies have fixed premiums that remain the same throughout the term.

When it comes to cost, variable life insurance is typically more expensive than term life insurance. The higher cost is due to the administrative fees and investment management fees associated with variable life insurance policies. Term life insurance, on the other hand, tends to be more affordable, especially for young and healthy individuals.

In summary, variable life insurance offers the potential for higher returns and flexible premiums but comes with higher costs and investment risks. Term life insurance, on the other hand, provides pure insurance coverage for a specific term at a more affordable price but does not offer the opportunity for cash value accumulation. The choice between the two depends on an individual's financial goals, risk tolerance, and the level of coverage needed.

Pros and cons of variable life insurance

Variable life insurance is a type of permanent life insurance policy that provides coverage for the entirety of the policyholder's life, as long as premiums are paid. It has a higher potential for earning cash compared to traditional policies, as the policyholder can decide how to invest the cash value.

Pros

• Financial protection for your family: Variable life insurance policies provide a death benefit, which can help cover end-of-life expenses and provide financial support for your family in the event of your death.
• Potentially increased death benefit: Policyholders may have the option to convert their cash value into a higher death benefit, resulting in a larger payout for beneficiaries.
• Flexibility and choice: Variable life insurance offers flexibility in terms of premium payments and investment choices. Policyholders can choose from several funds when deciding where to invest their money, and they may have the option to adjust their premiums if they have sufficient funds in their cash value account.
• Potential for higher returns: Variable life insurance policies have the potential to earn higher returns compared to other types of permanent life insurance due to the investment options available.

Cons

• High premiums and fees: Variable life insurance policies generally have higher premiums and fees compared to other types of life insurance. Policyholders may also have to pay management fees for their investments.
• Investment risk: Variable life insurance policies are subject to market risk, as the cash value is invested in various funds. Poor investment performance can lead to a decrease in the cash value.
• Capped returns: The amount of money that can be made on the cash value is typically limited, as insurance companies often put a cap on the maximum rate of return.
• Complexity: Variable life insurance policies are more complex than other forms of life insurance and require active management and a certain level of financial knowledge.
• Limited investment options: The number of investment options available may be limited, and they may not meet the needs of all policyholders.

How does variable life insurance work?

Variable life insurance is a type of permanent life insurance policy, which means it provides coverage for the entirety of the policyholder's life, as long as premiums are paid. It is also known as variable appreciable life insurance.

Variable life insurance policies have two components: a death benefit and a cash value account. The death benefit is paid to the policyholder's beneficiaries when the policyholder dies, as long as the terms of the policy have been met. The cash value account is essentially an investment account, which the policyholder can choose how to invest. This is the unique feature of variable life insurance.

When you pay your premium, the insurance company keeps a portion for account maintenance and fees, and puts some money towards the death benefit. The rest goes towards the policy's cash value. The policyholder can then choose how that money is invested. It is usually invested in mutual funds, but there are other options, including index funds, equities, bonds, or money market funds. The cash value can be used to increase the death benefit, withdrawn as cash, or used as collateral for a loan.

Variable life insurance policies tend to have higher fees than other types of life insurance, and the cash value can be influenced by the performance of the stock market, meaning there is a risk of losing money.

Who should consider buying variable life insurance?

Variable life insurance is a type of permanent life insurance that allows you to invest the money from your cash value. It is designed for people who want to take an active role in managing their life insurance and are comfortable with adding stock market risk to their policy. Here are some factors to consider when deciding whether to purchase variable life insurance:

• Risk tolerance: Variable life insurance carries higher investment risk compared to other types of life insurance policies. The cash value in a variable policy can be invested, but returns are not guaranteed. While there is potential for higher returns when the market performs well, there is also the possibility of losing money if the market declines. Individuals considering variable life insurance should carefully assess their risk tolerance and ensure they are comfortable with the potential for investment losses.
• Investment goals and alternatives: Variable life insurance is often considered by individuals with specific investment goals and a desire to maximize their investment options. However, it is important to explore alternative investment vehicles first. Traditional investment accounts, such as retirement accounts like IRAs or 401(k)s, typically offer higher returns. It is recommended to maximize contributions to these tax-advantaged accounts before turning to variable life insurance as an additional investment vehicle.
• Financial situation: Variable life insurance policies tend to have higher premiums compared to other types of life insurance. Individuals considering variable life insurance should evaluate their financial situation and ensure they can afford the potentially higher costs. Additionally, those with high net worth may find variable life insurance appealing as it provides an opportunity to invest while also offering a tax-free inheritance for beneficiaries.
• Hands-on approach: Variable life insurance requires a hands-on approach to investing. Policyholders are given some flexibility in choosing how their cash value is invested within the options provided by the insurer. Individuals considering variable life insurance should be prepared to actively manage their investments and select the appropriate sub-accounts for their cash value.
• Understanding of the policy: Variable life insurance policies are complex and require a thorough understanding of their features and potential risks. It is recommended to consult with a financial advisor or a fee-only life insurance consultant to ensure a clear understanding of how the policy works, including its investment options, fees, and potential risks.

Frequently asked questions