Variable life insurance is a type of permanent life insurance policy that offers policyholders a death benefit and the ability to invest the cash value component of the policy in various investment options, such as stocks, bonds, and mutual funds. The investment performance of these options will determine the growth of the policy’s cash value, which can be used to help pay premiums or provide a source of income in retirement.

How Does Variable Life Insurance Work?

Variable life insurance works much like any life insurance policy in that you pay a premium and then your beneficiaries receive a benefit when you die. As a permanent policy, the coverage is in effect until your death.

It also includes a cash value component that is invested in a variety of options, such as stocks, bonds, and mutual funds, chosen by the policyholder. The investment performance of these options will determine the growth of the policy’s cash value, which can be used to help pay premiums or provide a source of income in retirement. The policyholder can access the cash value through loans or withdrawals.

Variable life insurance policy has three primary components:

Death Benefit

The death benefit of a variable life insurance policy is the amount that is paid to the policyholder’s beneficiaries in the event of their death. The death benefit amount will depend on the policy’s face value and the growth of the policy’s cash value. The policy’s face value is the amount that is specified in the policy at the time of purchase. The growth of the policy’s cash value will depend on the performance of the investment options selected by the policyholder.

Cash Value

The cash value component of a variable life insurance policy is the portion of the premium that is invested in a variety of options chosen by the policyholder. The growth of the policy’s cash value will depend on the performance of the investment options selected by the policyholder. Policyholders can access the cash value through loans or withdrawals for personal or business needs, such as supplementing retirement income or paying for college tuition.

Premium

The premium is the amount that the policyholder pays to maintain the life insurance policy. The premium for a variable life insurance policy can be flexible and can be adjusted based on the policyholder’s current financial situation. Premium payments are used to fund the death benefit and the cash value component of the policy. The growth of the policy’s cash value will depend on the performance of the investment options selected by the policyholder and the amount of premium payments made by the policyholder.

In summary, variable life insurance combines the features of life insurance and investment products, providing death benefit protection and the potential for investment growth through the cash value component. Policyholders should be comfortable with market risk and have a strong understanding of the investment options available in order to make informed decisions about their policy.

Pros and Cons of Variable Life Insurance

Pros

• Potential for higher returns through investment options: One of the main advantages of variable life insurance is the potential for higher returns through the investment options available in the policy. Policyholders can choose from a variety of investment options, such as stocks, bonds, and mutual funds, and the growth of the policy’s cash value will depend on the performance of these options.
• Flexibility in choosing investment options and adjusting premium payments: Variable life insurance also offers flexibility in choosing investment options and adjusting premium payments. Policyholders can change their investment options as their financial goals and risk tolerance change, and they can also adjust premium payments based on their current financial situation.
• Access to policy cash value through loans or withdrawals: Variable life insurance policies also provide access to the policy’s cash value through loans or withdrawals. This can be a valuable source of funds for policyholders in the event of a financial emergency or for funding future financial goals.
• Death benefit protection: Like other life insurance policies, variable life insurance provides death benefit protection. The death benefit amount will depend on the policy’s face value and the growth of the policy’s cash value.

Cons

• Market risk: One of the main disadvantages of variable life insurance is market risk. The investment options in the policy’s cash value component can decrease in value, which can result in a lower death benefit or the need for additional premium payments to keep the policy in force.
• Higher premium costs compared to term life insurance: Variable life insurance policies typically have higher premium costs compared to term life insurance. This is because variable life insurance policies offer the potential for investment growth and have a longer-term focus.
• Complexity and uncertainty in understanding investment options and performance: Understanding the investment options and performance of a variable life insurance policy can be complex and uncertain. Policyholders should be comfortable with market risk and have a strong understanding of the investment options available.
• Limited guarantees on the death benefit and cash value: Variable life insurance policies typically have limited guarantees on the death benefit and cash value. The death benefit amount and the growth of the policy’s cash value will depend on the performance of the investment options selected by the policyholder.

What are the Tax Benefits of Variable Life?

Variable life insurance provides tax benefits in several ways. The growth of the policy’s cash value is tax-deferred, meaning that policyholders do not have to pay taxes on the growth until they withdraw it. Additionally, loans taken against the policy’s cash value are generally not taxed as income. Finally, death benefits paid out under a variable life insurance policy are generally income tax-free.

What are the Risks of Variable Life Insurance?

The main risk associated with variable life insurance is market risk. The investment options in the policy’s cash value component can decrease in value, which can result in a lower death benefit or the need for additional premium payments to keep the policy in force. Additionally, some investment options may be more volatile than others, adding an extra layer of risk. Some companies allow the option to allocate a portion of your premium to a fixed account, which guarantees a rate of return, to reduce overall risk.

How Variable Life Insurance Compares to Other Insurance Products

Variable Life Insurance vs. Variable Universal Life Insurance

Variable universal life insurance is similar to variable life insurance, but offers greater flexibility in premium payments and death benefit amounts. Additionally, variable universal life insurance policies may offer additional living benefits, such as long-term care coverage. However, variable universal life insurance also typically has higher premium costs and greater uncertainty in the growth of the policy’s cash value.

Variable Life Insurance vs. Term Life Insurance

Term life insurance provides death benefit protection for a set period of time, typically 10, 20, or 30 years. It does not have a cash value component, and premiums are generally lower than for variable life insurance. However, term life insurance does not offer the potential for investment growth or access to policy cash value.

Variable Life Insurance vs. Whole Life Insurance

Whole life insurance is also a type of permanent life insurance that provides death benefit protection and a guaranteed cash value component that grows over time. Premiums for whole life insurance are generally higher than for variable life insurance, and policyholders do not have the flexibility to choose investment options or adjust premium payments. However, whole life insurance provides more certainty in the growth of the policy’s cash value.

How to Buy Variable Life Insurance

To buy variable life insurance, policyholders should research insurance companies and compare policies to determine the best option for their needs. They should also work with a financial advisor to understand the investment options and risks associated with the policy and to determine if variable life insurance is a good fit for their financial goals and risk tolerance. Before purchasing a policy, policyholders should also consider their current financial situation and future financial needs, such as providing for their family in the event of their death, or saving for retirement.

Who is Variable Life Insurance Best For?

Variable life insurance is best for individuals who are looking for a permanent life insurance option with the potential for investment growth. It is also ideal for those who are comfortable with market risk and have a long-term investment horizon. Policyholders should have a strong understanding of the investment options available and be willing to regularly monitor the performance of their policy’s investments. Additionally, individuals who are looking to use the policy’s cash value for future financial needs, such as paying for college tuition or supplementing retirement income, may find variable life insurance to be a good fit.