Rates for Variable Life Insurance

In the highly competitive arena of variable life insurance, the key factors to consider when buying a policy are the premium rates and the rates of return for the policy’s separate accounts.  Both are critical components in the structure of a variable life policy, so it is important to understand how they can impact the long-term performance of your policy.

Variable life insurance, like its whole life counterpart, has a level premium schedule along with a minimum guaranteed death benefit. In both cases, a portion of the premium payment, after insurance costs, are allocated to a savings component. The primary difference with variable life is that the savings component is actually a series of separate accounts that provide the policyholder with investment options.

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The Variable Advantage

One of the distinct advantages of a variable life policy is that, if the separate accounts, which consist of stock and bond portfolios,  perform well, the growth in the cash value can actually increase the death benefit level.  If the investment values increase, the death benefit increases, and, conversely, when the values decrease, the death benefit decreases, but never below the minimum death benefit.

The level of the death benefit is driven largely by the performance of the investments within the separate accounts.  There are actually two ways that cash value growth can positively impact the death benefit.  One is based on a formula called the Corridor Percentage which is based on current tax laws that require that there be a minimum corridor between the cash value level and the level of the death benefit. Once the cash value pushes up into the corridor, the death benefit level must rise proportionately. 

Another way the death benefit can increase is through paid-up additions. This is where excess earnings from the separate account are used to buy small chunks of paid up life insurance, thereby increasing the total death benefit amount.  Each paid up block of insurance continues to earn returns from the separate accounts, so it has a compounding effect on the cash value growth.

As a result, variable life policies have the potential to provide ever increasing insurance coverage that can increase the amount of benefits paid in the future which can offset the increase in the cost of living over time. 

The Premium Factor

The premium rates and the rates of return of a variable life policy are primary determinants in the potential growth of the policies cash value.  Policies with higher costs of insurance and management expenses can impede the cash value growth, and policies with separate accounts that regularly underperform the financial markets will be slower to impact the death benefit level.

Variable life premium rates vary from one insurer to another and the more competitive they are the more of your actual premium may be allocated to the separate accounts.  Factors that influence the premium rate are mortality costs and other expenses.  Companies with better mortality experience could charge less for these costs.

The key to determining how the premium rate could affect the overall performance of your policy is to do a comparison of hypothetical projections from several variable life companies using the same rate of return for each projection.  You will be able to determine the net rate of return based on the total amount of premium paid into each policy.  You may find that a higher priced policy could actually generate a better net return than a policy with lower premiums – or vice versa. The key to look at the net investment performance over a 20 year period. 

Performance is Key

The larger factor that can impact your death benefit level is the growth of the cash value which is determined by the investment performance of the separate accounts.  While no one can forecast future results, the best indication of future performance are past results.  The separate accounts are managed by professional managers whose objective is to outperform the markets.  Each variable company is required to produce a historic record of their separate account performance which can be studied and compared.

It is important to compare apples to apples where you can. If your own preference is to invest in conservative growth stocks, then you need to compare conservative growth stock separate account performance.  Likewise, if you want to include other types of investment portfolios such as bonds, aggressive stocks, index funds, etc. 

One other key to comparing past results.  Some accounts may perform extremely well in positive markets while performing extremely badly in negative markets.  While this may not seem out of line, good professional managers seek to maximize their upside returns in up markets, while minimizing their losses in down markets. 

The best managers achieve solid gains in up markets and are able to outperform the market on the downside as well, meaning, their portfolios will suffer smaller losses than the overall market.  Over a long period of time, accounts that demonstrate more stability in their returns can generally outperform accounts that have a history of big, wide swings in their returns. 


People who buy variable life insurance understand investing, investment risks and long time horizons. They also recognize that a variable life policy offers the potential to greatly expand their life protection while accumulating significant cash values.  For people who recognize the need to provide continual life insurance protection throughout their lifetimes, variable life is, potentially, the most cost effective way to optimize your coverage over a long period of time.

The key to maximizing the potential benefits of a variable life insurance policy is to be mindful of the premium rate and the rates of return on the separate accounts.  Variable life insurance policies must be sold with a prospectus and it behooves any prospective buyer to carefully review all of its details on expenses, fees, investment objectives and past performance. Variable companies should also be able to produce a customized projection based on hypothetical returns that will enable you to compare premium rates and net returns using the same assumptions.

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