Variable life insurance is one of your options when you want life insurance with added benefit. The extra benefit comes in the form of cash value or living benefit. Being of whole insurance genre, there is, of course, the essential death benefit too. So, variable life policy comes with two features—death benefit and cash value.
Let’s skippablly bear in mind…
Death benefit is the amount of money your heirs or beneficiaries receive from the insurer at your death.
And, cash value is the money that your insurer shares with you from the profit they make out of your money.
Let’s also remember…
All cash value of whole life insurance finally merges to form the death benefit.
More cash value=More death benefit.
And, when you want your insurance to fetch more cash value=more death benefit, variable life insurance may arguably be the right choice for you.
You already understand…
Your insurer invests your money for you to receive the cash value.
They use different approaches to investment. It is the approach that makes variable life insurance unique.
On a variable life insurance plan, you have various investment options to choose yours from. A number of various sub-accounts lie before you to choose for investment. The ‘variable’, however, has nothing to do with the sub-accounts’ being ‘various’. Instead, Wikipedia explains it: the ‘variable’ component in the name refers to the ability to invest in separate accounts whose values vary—they vary because they are invested in stock and/or bond markets.
There may be as many as 50 or even more such accounts.
They are usually promising.
The fact is, the purpose of variable whole life insurance policy is poised more toward the investment than to the insurance. Or, both purposes interplay equally important roles. More income stands for more policy benefit in the end.
Thus, variable life insurance holds possibilities of higher income growth.
The following discussion briefly explains different aspects of the variable policy.
Typically, when you buy the basic type of whole insurance, your insurer retains the control-key to the policy. They divide your premium into two sections: death benefit and investment portfolio.
For you, it is a no-say game.
Your insurer decides the whole thing up and down. They decide how much to keep back for building the death benefit. Similarly, they decide how much they would invest to develop the cash benefit. Also, it is their exclusive right to decide where they would invest. Despite being a partner investor with the insurance company, you stay nowhere on the way.
When you are on the variable life insurance policy, you are somebody with your insurer. As you already learned, they hold before you a list of sub-accounts. They contain: mutual funds, bonds, stocks, commodity funds, fixed income funds, equities, government money market and real estates. You are free to choose the ones that you find best.
But your freedom does not come without responsibility. If the accounts perform well, you will earn more for the cash value. Conversely, poor performance of the accounts will affect your cash value component.
Usually, the accounts perform well.
6 Advantages of Variable Life Insurance
Flexibility with Regard to Investment
Flexibility with regard to investment is the core attraction of a variable life insurance plan. You enjoy it in 3 ways:
It provides you freedom to choose sub-accounts that you find best for yourself.
You can make changes to the sub-accounts if you wish to.
Also, variable life insurance allows you to transfer money between sub-accounts.
Guaranteed Death Benefit
Insurance is all about the coverage, face value or death benefit, the same thing that goes by different names. You want to make sure your heirs have a legacy or protection when you are no more with them. And, you cannot but make sure it comes for certain to them.
Your variable life insurance policy guarantees that no matter how your investment performs, your heirs will not be deprived of the protection you want. There will be a minimum amount of benefit that your heirs will inherit when you die.
High Income Potential
The proceeds that might come from a variable life insurance policy are often higher-yielding than in other cash value policies. Being securities based, the sub-accounts usually bid fairer. If the market favors, there is good possibility of having a better cash value.
Besides profits, variable life insurance offers you the opportunity to take out loans from your cash value. And the loans that you have are tax-advantaged. As usual, the death benefit also comes without your having to pay income tax.
Use of Cash Value
You can make use of your cash value in 2 important ways:
You can surrender your policy and take out your cash value accumulation when you have variable life insurance.
If you want, you may use your cash value to adjust your premiums. As a result, your burden lessens.
Flexible Coverage and Premium Option
In conformity with the policy’s provisions, you can increase as well as decrease the death coverage. Also, you have the choice to lower or raise your coverage in accordance with policy-defined limits.
6 Cons of Variable Life Insurance
There are substantial reasons for you to beware of this policy. There are an equal number of disadvantages of variable life insurance.
Variable life policy is not inexpensive at all. In comparison with ordinary whole insurance, it may be a lot more expensive. If you want to earn more, you also need to pour in more of your money into the sub-accounts.
Insurer’s Interest Comes First
Though variable life insurance policy is projected as user-friendly, the reality is the insurer’s interest is taken care of first. After they have taken out the fees and costs for the policy, they send out the rest of your money to investment.
Borrowing on Interest
It is true you can borrow from your cash value. But you may be shocked to know how borrowing works. You cannot borrow your own money on interest.
No Guaranteed Return Rate
Unlike most whole life plans, your investment is not shielded with any minimum guaranteed interest rate. So, you cannot be sure what will actually happen to your investment.
Affects Death Benefit
A more disappointing fact is that your cash value is used as a collateral for the loan. If unpaid, your death benefit will be lower than you would expect.
Surrendering Can Be Pathetic
How about the surrender? Consumers report that it is more pathetic. It is like the fox, mice and bread story. Surrendering not only nullifies the insurance, but also takes away much of the money that you invest. Along with maintenance charges, your insurer slices off different costs on surrender and that takes away a good portion of the policy value. If you have any profit, income tax is going to axe it down when you surrender. So, finally what you have is a spell of disappointment that you should not have earned over years of hopefulness.
Variable life insurance is not for average income people. Nor is it suitable for those who are not truly knowledgeable in the way the money market works. Before you decide, you should make sure you understand you have what it takes to be a buyer of variable life insurance plan.