The Features of Variable Life Insurance
Variable life insurance is a type of permanent life insurance that has several features in common with whole life insurance, and a few major differences:
- Permanent coverage
- Pays a death benefit
- Guaranteed death benefit
- Fixed premiums
- More investment options
- More risk, more growth potential
The biggest difference between variable life insurance and whole life insurance is that variable life insurance allows policyholders to select from a wider variety of investment options for the cash value account – and this creates greater risks, but also the possibility for greater rewards.
Variable life insurance is a permanent life insurance product, like whole life insurance or universal life insurance. It covers the policyholder and provides a death benefit at any time during the course of the policyholder’s life – no matter the age of the policyholder. (This is different from term life insurance, which only covers a specific timeframe in the policyholder’s life – usually 10, 20 or 30 years.)
People buy variable life insurance to have the peace of mind of knowing that their life insurance coverage will always be with them – no matter how long they live. Term life insurance protects against the risk of dying young – variable life insurance (and other permanent life insurance) offers death benefits at any stage of life – including the possibility of living a long life.
Pays a Death Benefit
Variable life insurance pays a death benefit to the beneficiaries assigned by the policyholder – spouse, family, children or other loved ones. Life insurance policies can also be assigned to benefit the policyholder’s estate itself or a charitable organization – this is one reason that permanent life insurance policies are valuable for estate planning.
Guaranteed Death Benefit
Variable life insurance policies offer greater risk in terms of their investment characteristics (see below), but one place where there is no risk to the policyholder is in the death benefit, which is a fixed amount. No matter what happens with the stock market, a variable life insurance policy will continue to provide a guaranteed death benefit for as long as the policyholder lives.
Variable life insurance policies are set up with fixed premiums and a steady payment schedule. This creates a discipline and “forced savings” effect that helps the policyholder save (in the cash value/investment component of the policy) while also making the regular insurance premium payments.
Variable life insurance policyholders can also benefit from knowing that their premium payments will never increase and that they can continue making their payments on a consistent and reliable schedule. Like whole life insurance, as long as premium payments are made, the policy remains in effect.
One exception to this is variable universal life insurance – this is a variation on a standard variable life insurance policy that contains elements of a universal life insurance policy. With a variable universal life insurance policy, the policyholder has the flexibility to choose payment arrangements, vary the amount or timing of premium payments, and generally exercise more freedom over how to manage the cash value and premium obligations of the insurance policy.
More Investment Options
The biggest difference between variable life insurance and other forms of permanent life insurance is that variable life insurance offers a much wider array of investment options for the cash value portion of the policy.
With whole life insurance and universal life insurance, the cash value component of the policy is guaranteed – which means that it is guaranteed not be exposed to any risk, and therefore not to grow. With a whole life insurance or universal life insurance policy, the cash value will always be there, and it will grow over time, but only at low rates of interest.
For people who are not satisfied with such a slow-growing investment, variable life insurance offers a more diverse selection of stock and bond funds to invest in. Similar to a mutual fund, with variable life insurance the policyholder can choose where to invest the cash value of the policy.
Investment options vary according to the offerings of each individual insurance company – each company has a variety of funds that it makes available to variable life insurance policyholders. Since every investment has an element of risk, variable life insurance policyholders should consider their risk tolerance, their overall financial goals and the overall contents of their investment portfolio before deciding where to invest their variable life insurance cash value.
More Risk, More Growth Potential
Variable life insurance has an added element of investment risk, and this risk is not for everyone. People who want the reassurance of the guaranteed cash value offered by whole life insurance, or the fixed interest rates of universal life insurance, should probably not consider buying a variable life insurance policy.
The ideal candidate for a variable life insurance policy is a more sophisticated investor who has a higher tolerance for risk and a higher appetite for growth. Instead of watching their cash value languish for years in low-interest accounts, these policyholders want to put that money to work.
Just like any investment, variable life insurance investments have the potential to go up or down depending on market conditions. There is definitely an added risk to buying variable life insurance – the cash value is not guaranteed, and may even lose value over time.
But for people who want to use their life insurance policy as a true “investment” and not just a low-yield cash savings fund, variable life insurance could be valuable by providing financial protection in case of death, while also helping them reach their long-term financial goals.
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