Everything You Need to Know About Variable Life Insurance
Looking for an Affordable Policy?
If you’re planning to buy a life insurance policy, it’s possible that you’ve heard about variable life insurance. But what is it? How does it work? Is it worth the costs? What are its advantages and disadvantages? How does its cash value work? What are its alternatives? And where can you get it from?
The concept of life insurance was not born yesterday. It has been around for years now and is considered one of the greatest things you can do to your family after you pass away.
Over time, life insurance has evolved from a simple insurance policy that provides death benefits only to offering many saving and investment benefits.
One type of life insurance policy that enables the policyholder to participate in the equity market’s growth is ‘variable life insurance’.
What is Variable Life Insurance?
Variable life insurance, also called variable appreciable life insurance, is a type of life insurance policy whose most prominent features are being permanent and having an investment component. In addition to these two characteristics, it also has a cash value account that is invested in many sub-accounts. These sub-accounts act as mutual funds.
It’s worth mentioning that variable life policies have many sub-accounts from which to choose.
Cash value accounts tend to grow concurrently as the investments in the sub-accounts grow. And, they tend to drop simultaneously as the investments in the sub-accounts drop.
How Does This Type of Policy Work?
To start with, the variable policy consists of three major components: death benefits, regular premiums, and cash value.
The death benefit is your life insurance coverage and the amount of money your beneficiary is going to receive after your death. It’s also called the policy’s face value. Like all life insurance types, the death benefit is income-tax free when it comes to the beneficiary.
The regular premium is the amount of money you pay for your policy on a regular basis. Those premiums fluctuate depending on your account’s cash value. You can use some of the cash value to decrease your premium expenses. You can also increase your premium payments, so that you stay afloat in case your cash value drops.
The cash value is an account that is linked to your life insurance policy. Your premium portion that is added to this account can sometimes be invested in stock and money market funds, based on the policy provider.
The more your cash value is, the higher the death benefits will become, even if they exceed the initial amount. It’s because the death benefit should be a specific percentage that’s greater than the cash value.
It’s worth noting that, like all permanent life insurance policies, your beneficiary/s will receive the death benefit after you pass away without the cash value.
Pros of Variable Life Insurance
Some of the most prominent advantages include:
- Tax Deferral: it funds in the investment account are considered tax-deferred. This in fact grows those funds.
- Fixed Premiums: one of the most important advantages of buying a policy is that its premium amount is usually fixed. Thus, the policyholder won’t be stressed over whether the premiums will increase in the future or not.
- Cash Borrow: funds that the policyholder invests can be obtained at very limited or sometimes no interest.
- Death Benefits: in spite of the fact that the market has the ability to affect the coverage’s investment value, the death benefit amount is protected. In other words, no matter what happens in the market, the funds will be serviceable if needed.
- Investment Variety: because there is a wide range of investment options, the plan can provide the policyholder with many choices concerning their investment funds growth. This is different from other types of permanent policies wherein the insurer determines the investment allocations and the interest rate provided to the policyholder.
Cons are Here
The variable life insurance downsides should not be disregarded.
- Expensive premiums: premiums are mostly cheaper than other types of life insurance. Yet, they are still expensive compared to initial premiums of a term life policy.
- Expenses are responsible for decreasing your cash returns: it requires the expense, administrative, and management fees. These fees can be a roadblock to your cash value growth. In other words, there’s no guaranteed cash growth.
For some people, the advantages override the disadvantages. They can get quality insurance coverage at a low cost and invest their money on their own with fewer restrictions (fees).
How Does Cash Value Work?
Every time the policyholder pays their premium, the insurer takes a percentage of it and places it in their policy cash value. This cash value is then invested in some sub-accounts of the policy holder’s choice.
The best way to think about those sub-accounts is by imagining them as if they were mutual funds. It’s worth remembering that those sub-accounts are useful only in the policy as the policyholder cannot think of investing in them outside the boundaries of the policy.
Just like all kinds of investment, cash value fluctuates based on how well the investment is. If the stock market is in a free drop, the cash value is, too. Some people refer to it as a ‘super-IRA’ because investing in it is tax-deferred.
It’s worth remembering that in every permanent life insurance policies, the policyholder’s death benefit consists of two components: cash value and a regular term life insurance policy.
Over time, the more your cash value grows, the smaller your term life insurance policy will get. In this case, your cash value will be covering your death benefit, and your policy won’t have a term component anymore.
This can in fact be puzzling to those who think that by purchasing a variable insurance policy, they are going to get both the cash value and the death benefit after they pass away. Instead, the cash value will replace the term policy until it represents your death benefit.
Finally, there are a number of ways through which you can withdraw your cash value from your policy before you pass away. They are in fact less flexible compared to the whole life insurance policy, though.
You can also let go of your policy to get your cash value. Yet, the majority of the growth will not take place for 2o to 30 years. Bear in mind that in case you surrender your policy in the first two decades, this will end you up paying more fees than the profit you will have made.
What Alternatives Do You Have?
- Term Life Insurance: this type of insurance policy is cheaper compared to variable life insurance. Unlike the variable life insurance policy, term life comes to an end after a certain number of years and doesn’t have any saving or investment features. In term life insurance, the policyholder can purchase more coverage for a small premium.
- Other Types of Permanent Cash Value Plans: there are still three other kinds of permanent life insurance: variable universal life insurance, whole life insurance, and universal life insurance. These are different from variable life insurance in terms of cash value. Each one of them adopts its own approach to growing the cash value.
Where Can You Buy the Policy?
Generally speaking, you can purchase the policy from the insurers who sell permanent life insurance policies. However, experts recommend resorting to an agent or broker instead.
Independent agents can help you choose what’s best for you when it comes to the type of policy you should buy. Bear in mind that those agents must be licensed before they give any advice.
Things to Take into Consideration
People who have a variable life plan are required to consider the policy’s investment portion. Thus, it’s important to know how investing in mutual funds and stocks works before you move any further with the policy purchase process.
That being said, the policyholder should be risk-tolerant because the invested funds value can fluctuate on a regular basis.
Because these policies are flexible; they sometimes allow policyholders to get higher return rates on invested funds while receiving an amount of coverage.
Another factor you should take into account is the aim of the policy. If you wish for a simple life insurance policy through which you can protect your family after your death, a variable life insurance policy will be the best choice you hit.