What Is Variable Life Insurance?
Variable life insurance is a type of permanent life insurance policy that offers a death benefit if you pass away and an investment component. These life insurance policies can be complex, and while they may offer a return on your investment, they come with some risk. Knowing how these policies work will allow you to decide if variable life insurance fits you and your needs.
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How Does Variable Life Insurance Work?
Variable life insurance works by offering two main components within one policy: the insurance component and the investment component. Similar to other permanent insurance policies, variable life insurance policies build up a cash value. However, variable life policies allow you, the consumer, to be more active in where your money is invested.
Who Is Eligible for Variable Life Insurance?
As with other life insurance policies, you may have to meet some eligibility requirements to purchase a variable life insurance policy. These eligibility requirements may include your overall health condition, height and weight, occupation, tobacco usage, and hobbies. For insurance companies to insure your life, they want to make sure that you are in good health. If you have pre-existing conditions or serious health issues, you may not be eligible for this type of policy.
The Insurance Component
The main objective of any life insurance policy is to provide your beneficiary with a monetary payout should you pass away. Variable life insurance is not an exception to that.
A variable life insurance policy will have a death benefit that you choose based on your specific needs. The death benefit is tax-free and can be used by your beneficiary to help pay off debt, pay for funeral expenses, or for any reason they choose.
This death benefit is guaranteed as long as you keep up on the policy’s payments and the policy is well funded. Should the policy become underfunded, meaning not enough premium was paid to cover the cost of life insurance and expenses, the policy could lapse.
The Investment Component
The investment component of a variable life insurance policy sets it apart from other types of permanent life insurance. When you pay your premiums for a variable life policy, the insurance company retains a portion to cover your cost of life insurance and expenses.
Then, the remaining portion of the premium remains to build up the policy’s cash value. The cash value is then invested into subaccounts that you can choose. These subaccounts are typically made up of mutual funds, bonds, and stocks. If the subaccount you are investing in does well, you will see a return on your premiums. However, if the subaccounts do poorly, you could see a loss. You may also elect to invest some of your cash value into a non-investment fixed account.
How Much Does Variable Life Insurance Cost?
Variable life insurance may be more expensive than other life insurance policies. This is because it not only offers a guaranteed death benefit but also an investment component. Also, variable life insurance may have other fees — such as management fees and expenses — that may raise the policy’s overall cost.
Many factors contribute to the premium you will pay for a variable life policy, including:
- Your personal information: This may include your gender, age, occupation, hobbies, and tobacco usage.
- Your overall health: This can include any pre-existing conditions, your height and weight, and family health history.
- Your coverage: The more coverage you choose, the higher the premium you will pay.
- Type of policy: There are different types of variable life insurance policies, such as whole life and variable life. The type you choose will affect the overall cost.
- Funding of policy: Some variable life policies will allow you to raise the premium you pay to invest more into the policy’s cash value. The more that you invest, the higher the premium you will pay.
- The insurance company: Some insurance companies may have higher premiums due to higher fees and expenses.
Should You Get Variable Life Insurance?
There are many types of life insurance policies, and a variable life policy may or may not be the best fit for you. Consider all aspects of this type of policy, including the rewards and risks.
Consider Getting It If…
You should consider getting a variable life insurance policy if the following apply to you:
- You are able to take a hands-on approach to your policy. Unlike other policies, you must make some decisions regarding your investments.
- You are willing to take on some risk of losing cash value from your policy.
- You are familiar with life policies and understand how investments, such as mutual funds, stocks, and bonds, work.
- You are willing to pay a higher premium than other life policies.
When deciding if a variable life policy is right for you, it is important to keep in mind the following advantages:
- A combination of life insurance and an investment component
- Possible higher gains than a traditional life insurance policy
- Guaranteed death benefit
- Tax-deferred gains
- Tax-free death benefit to your beneficiaries
- More control of your investments than a traditional life insurance policy
Although variable life policies have many advantages, there are some disadvantages as well. Keep in mind the following drawbacks when considering a variable life insurance policy:
- Risk of losing cash value
- Higher premiums compared to other types of life insurance policies
- More complex than traditional life insurance policies
- Requires a more hands-on approach
- There may be a surrender charge period. During the first years of the policy, if the policy is cashed out, there may be a surrender charge
How to Get Variable Life Insurance
If you decide that a variable life insurance policy is right for you, there are some steps that you should take to obtain a quality policy.
- Research insurance companies. Purchasing your insurance policy from an accredited and stable company is essential. You can research online at AM Best to find a company that is up to par.
- Get quotes. Once you narrow your companies down, you can contact them to get a quote. An insurance representative can help you decide what death benefit would be best for you and explain the quote’s details.
- Choose a policy. When selecting amongst quotes, it is crucial to consider the premium and the company. It is also essential to ask if any policies have additional benefits, such as extra riders.
- Submit an application. Once you have chosen a policy, you must apply. This process will consist of you providing the company with your personal information, including any health or medical information needed. You may need to answer some medical and lifestyle questions and complete a medical exam.
- Accept the policy. Once your policy is approved, you will be provided with a copy of the policy. Your insurance representative should review the policy carefully with you and discuss any changes. Once the policy is delivered to you, you will have a period, known as a free look period, to decide if the policy is right for you.
- Pay the premiums. On some life policies, you must pay a premium payment at the time of application. On others, you will only pay once the policy is delivered. It is important to pay your premiums on time to avoid a lapse in coverage.
Understanding the Free Look Period
There is a period of time after you receive your life insurance policy that you review it and cancel it without penalty. During this time, you can cancel the policy, not be subject to any surrender charges, and receive a refund on any premiums paid. The free look period varies from 10-30 days, depending on the state and policy.
Alternatives to Variable Life Insurance
If variable life insurance is not the best fit for you, there are other alternatives to consider, such as universal life, whole life, and term life policies.
Whole Life Insurance
A whole life policy offers a guaranteed death benefit with a cash value along with set premiums. This type of policy provides security because you will always have a life insurance payout as long as you pay your premiums and a guaranteed cash value. Most whole life policies also pay dividends back to their policyholders if the company performs well.
These types of policies are suitable for those who want a guaranteed death benefit and set premium. Whole life policies are generally more expensive than universal and term life policies.
Universal Life Insurance
Another type of permanent insurance is universal life. These policies offer flexibility in both the death benefit and premiums. Universal life policies offer a cash value, but it is not guaranteed most of the time. The premiums you pay will significantly affect the policy’s cash value.
These policies can be less or more expensive depending on the specifics of the policy. If you like flexibility in the amount you pay and your death benefit, this may be a good option. It would allow you to reduce your out-of-pocket expenses if finances get tight or increase your payments to increase your cash value.
Term Life Insurance
Term life insurance is another popular choice for life insurance. It differs from variable life insurance because it offers no cash value or investment components. It does offer a death payout upon the passing of the insured.
Term policies are sold for certain years or terms, such as 10, 20, or 30. During that term, the policy will pay out a death benefit. However, after the term has expired, the policy may lapse or renew at a much higher cost.
Understanding the Tax Benefits of Variable Life Insurance
When it comes to taxes, variable life policies offer attractive benefits. During the lifetime of the policy, the policy grows tax-deferred. That means that the policy owner is not taxed on any policy gains.
However, if the policy’s cash value is withdrawn, the policy owner is taxed on the gains only. For example, if the premium paid into the policy is $5,000, and the policy owner withdraws $6,000, only $1,000 of the withdrawal is taxed.
All in All
When purchasing life insurance, there are many options to consider. A variable life policy not only offers a death payout but also has an investment component.
A variable life policy is geared towards more seasoned consumers with knowledge of life insurance and investments. Because a loss in the cash value may occur, it is best to have another life insurance in place alongside a variable life insurance. A variable life policy may be a good option for those looking for life insurance with an investment component who can accept the potential gains and losses that come with investing.