Variable Life Insurance for Dummies

Like all permanent life insurance products, variable life has two different parts: The amount of the death benefit paid to the beneficiary or beneficiaries upon the death of the insured, and, the built-up cash value to which all of the earnings are credited while the policy is still in force.

Variable life insurance can be set up for both whole life insurance and universal life policies. “Variable” simply means that the cash in the cash account of the policy will be invested in a combination of investment accounts similar to mutual funds. The investments are made at the direction of the owner of the policy. This is an important feature to understand: The owner of a variable life insurance policy is solely responsible for all investment decisions and the allocation of assets.

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The Investments of a Variable Life Insurance Policy

Depending on the company from which the policy was purchased, a policy owner has several investment choices. Some insurance companies offer several dozen separate kinds of investment accounts. These accounts can be very low risk or very high risk, and just about everything in between. Options usually exist for domestic and international asset investment. While the variable policyholder is responsible for deciding where his or her money should be invested, the insurance company still manages the account and all regulations filings. Gains are therefore subject to management fees and charges.

The premiums paid by a variable insurance policy owner are not mixed with any of the insurance company or other policy owner’s assets. The account balance can rise and fall depending on market conditions and returns are never guaranteed. Because variable life involves the purchase of securities, the product must be registered with the Securities and Exchange Commission (SEC). And the insurance agent who sells variable policies must be licensed to sell both insurance and securities.

Some insurance companies also allow the policyholder to choose a fixed death benefit or a variable death benefit. A fixed death benefit pays the beneficiary an amount that is not determined by the amount of money in the cash account. A variable death benefit pays the beneficiary an amount that is increased or decreased by the amount of cash in the investment account. Before purchasing a policy, investors should consider how important the death benefit is to the beneficiary. If he or she will be adversely affected by a reduced payment, it might be best to choose a fixed death benefit. If, on the other hand, he or she has additional cash resources, a variable death benefit may be the better option.

Variable Universal Life Insurance

Variable universal life policy premiums are flexible, just as they are for traditional universal life policies. The policyholder can choose to adjust the premium amount and the payment schedule in order to meet his or her current financial needs. He or she can also reduce the amount of the premium if illness or a job-loss means not as much cash is available for the payment. This reduces the amount of cash that has remains in the account but can be a way for the insured to keep the policy in effect.

One disadvantage to a variable universal life policy is that a market sell-off will more than likely reduce the value of the account and the benefit. A policyholder might be asked to pay an additional premium in order to keep the value of his or her policy level.

Suitability of a Variable Life Insurance Policy

Variable life insurance policies are generally not recommend for people whose risk tolerance is low or whose families would be at risk if a reduced death benefit were paid. Further, policyholders are advised to have additional sources of liquid cash, such as savings, checking and money market accounts, and other assets like equities and bonds. A variable policy should not only be used as an investment tool, but also as a way to make sure that family members left behind will have the financial resources they need.

Because the earnings paid on a variable life insurance policy grow tax-deferred, they can grow much faster in less time. In addition, policyholders usually do not pay income tax on money that is borrowed from the account. Money is normally available for withdrawal up to the amount of the premiums that have been paid in, but will vary based on the insurance company that issued the policy.

As a life insurance product, the cash account and the money earned on that cash is not taxable for most policyholders. This favorable tax feature can sometimes help a policyholder to reduce his or her taxable income for the current tax year. And, because the death benefit paid to a beneficiary is not taxable in most cases, a parent can place money in his or her child’s variable life policy, allowing the parent to pass an inheritance tax free. Surrendering the policy, however, can result in significant charges and expenses. These fees will vary among life insurance companies, but most charge surrender fees if the policy is cancelled during the first 10 years.

A variable life insurance policy represents a security and is therefore not FDIC insured. The insurance company that sells the policy must be a member of the Securities Investor Protection Corporation (SIPC). The SIPC has a responsibility to restore assets to investors who have invested in bankrupt or otherwise financially challenged companies. Because of significantly higher premiums than other types of permanent insurance and the potential for a decrease in the value of the value of the policy, variable life policies have a much higher surrender rate. Most insurance companies believe that variable policies are suitable only for wealthier individuals with significant financial resources.

Variable life insurance polices are very complicated insurance and investment products. Investors are always to make sure they meet with a certified financial planner before purchasing a variable policy. Investors must ensure that the policy meets their financial and insurance needs without subjecting them to undue risk.

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