Variable Life Insurance: What You Need to Know

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What is variable life insurance?

life insurance 

Variable life insurance is a type of life insurance that provides a death benefit to your beneficiaries upon your passing and includes a cash value component that you can invest in. The growth of this cash value depends on the performance of your investments.

Due to the fluctuating nature of investments, variable life insurance carries more risk Compared to other life insurance types, especially during market downturns.

Here’s a breakdown of how variable life insurance works, its pros and cons, comparisons with other life insurance types, and considerations before purchasing a policy.

How Variable Life Insurance Works

When you buy a variable life insurance policy, your premiums 

Unlike other types of insurance, the growth of this cash value is not guaranteed and is dependent on the performance of your investments.

Key Features of Variable Life Insurance:

  • Permanent Coverage: Unlike term life insurance, which expires after a set term (e.g., 20 or 30 years), variable life insurance provides coverage for your entire life or until you reach an advanced age (e.g., 100 or 110).
  • Fixed Death Benefit and Premiums: The death benefit and premiums of variable life insurance are typically fixed, unlike variable universal life (VUL) insurance.
  • Cash Value Component: Variable life insurance policies build cash value and is assured
  • Investment Flexibility: You can invest the cash value in various subaccounts, ranging from conservative options like bonds to aggressive stock portfolios. This flexibility can lead to higher potential returns but also higher risks.

Pros and Cons of Variable Life Insurance Pros:

  • Permanent Coverage: Provides lifelong coverage as long as premiums 
  • Growth Potential: Offers the possibility of higher returns through investments in stocks and bonds.
  • Tax Advantages: The cash value grows tax-deferred, meaning you are taxed on investment earnings until you withdraw funds. This can be beneficial if maximized contributions to other retirement accounts.

Cons:

       High Risk: The value of your investments can decline, which might cause the policy to lapse if the cash value is not enough to cover the policy fees

  • Complexity: Managing investments and monitoring the policy’s performance adds complexity.
  • Expense: Variable life insurance is significantly more expensive than term life policies, with higher premiums and substantial fees.

Premiums and PaymentsVariable life insurance premiums are fixed, meaning they remain constant over time. These premiums are allocated towards.

As you age, the cost of insuring your life increases, which can reduce the portion of premiums allocated to the cash value. Some policyholders Choose to pay more in the early years to build the cash value more quickly.

Death Benefit and BeneficiariesWhen choosing a life insurance policy, you must designate a beneficiary to receive the death benefit, which is usually income tax-free and avoids probate. 

  • Level Death Benefit: The beneficiary receives the Policy’s face value.
  • Face Amount Plus Cash Value: The beneficiary receives the Policy’s face value plus the cash value.

Cash Value and Investment OptionsOne benefit of variable life insurance is the ability to invest the cash value in mutual funds or fixed-interest accounts. This investment flexibility allows for potential growth but also carries the risk of losses.

Policy Loans and WithdrawalsPolicyholders can borrow against the cash value, typically up to 90%. Withdrawals exceeding the premiums paid may be taxable.

Tax ImplicationsThe cash value grows tax-deferred, similar to retirement accounts. Taxes are only due on withdrawals that exceed the premiums paid

What is variable life insurance?

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Comparing Variable Life Insurance to Other Types Variable Life vs. Term Life: Term life insurance offers pure life insurance without a savings component, providing coverage for a specific term. It is often more suitable for individuals needing income replacement during their working years but not requiring lifelong coverage.

Considerations and Downsides

Variable life insurance can be highly complex and unsuitable for everyone. Given the exposure to market risk, this type of policy is best for those with a medium to high-risk tolerance. Additionally, the premiums can be prohibitively expensive for many people.

If you’re considering a variable life insurance policy, consulting with a fee-only financial advisor is wise. They can help determine if this type of coverage meets your needs and if additional life insurance riders are beneficial. Fee-only advisors don’t earn commissions from selling policies, ensuring unbiased advice.

It’s also important to consider alternatives to variable life insurance. Many individuals don’t require permanent life insurance. For instance, a term policy might be sufficient to support children until they are self-sufficient or to pay off a mortgage. Purchasing term life insurance and investing the savings for retirement is a viable alternative to variable life insurance.

Finding the Right Policy

If you decide that variable life insurance is suitable for you, here are some tips to help you choose the right policy:

  1. Read the Prospectus: Variable life insurance must be sold with a prospectus, which details the policy’s fees, expenses, investment options, and death benefits. It’s crucial to read this document and consult a professional about any aspects you don’t understand.

  2. Check Complaints: Use the National Association of Insurance Commissioners’ complaint index to see if an insurer has a high number of complaints relative to its size. A score of 1.0 indicates an average number of complaints; aim for a company with a score of 1.0 or less.

  3. Evaluate Financial Health: Ensure the insurer is financially stable by checking its ratings from at least two of the five independent rating agencies: A.M. Best, Fitch, Kroll Bond Rating Agency, Moody’s, and Standard & Poor’s.

  4. Consult a Neutral Professional: Before purchasing a policy, hire a fee-only financial planner or insurance consultant to review it. This ensures you receive an unbiased opinion, as they don’t earn a commission from your decision.

Conclusion

Variable life insurance is suitable for those who are comfortable with risk and can afford high premiums. Before purchasing, discuss your needs with a financial planner and explore all life insurance options.

If you’re looking for a combination of investment and insurance, variable life insurance may be appropriate. However, weigh the alternatives carefully. If your primary goal is financial protection for your loved ones, a less expensive term policy combined with investing the savings is often a better choice.

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