Types of Variable Life Insurance

Overview

There are two main types of variable life insurance:

Variable Life Insurance (Fixed Premium)

Most policies have fixed premiums due on a regular basis, like a typical whole life insurance policy. This enables policyholders to have the consistency and security of making regular payments and not having to worry about losing coverage.

Variable Universal Life Insurance

This type of policy combines aspects of both variable and universal life insurance – the cash value can be invested in a variety of different stock and bond funds (like variable life insurance) and the premium payments, death benefit, and cash value amounts are all flexible and can be changed over time (like universal life insurance).

One thing that both types of variable life insurance have in common is their higher-risk, higher-potential investment options for the cash value account. Because these investment options are classified as securities (financial assets), variable life insurance can only be sold by agents who are licensed to sell securities as well as insurance.

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Types of Variable Life Insurance Investment Options

Before buying a variable life insurance policy, ask to see a prospectus detailing the investment options and past performance of the funds. Just as if researching a mutual fund, people need to spend some time investigating the overall diversification and investment goals of the variable life insurance policy, and decide whether the policy is a good fit with the rest of their investment portfolio.

Options vary widely by insurance company, but most variable life insurance policies will offer a selection of stock and bond funds. Keep in mind that variable life insurance is an investment – plan and diversify accordingly.

What Type of Variable Life Insurance is Right for You

Variable life insurance is a higher-risk investment than other types of permanent life insurance, so buyers of variable life need to feel confident in their investment strategies and have strong self-awareness of their own tolerance for investment risk.

The best candidates to buy variable life insurance are savvy, experienced investors who understand that the stock market can go up and down over time, but who are willing to accept the risks in exchange for higher long-term growth potential.

Variable life insurance also requires policyholders to take a more “hands on” approach to managing their investments. As opposed to a traditional whole life insurance policy, where the cash value just sits and earns interest (albeit at a low, fixed rate), variable life requires policyholders to take action to allocate their investments among a range of choices – stocks, bonds or cash – and make sure that their investments are adequately diversified and that the overall allocation suits the policyholder’s strategy.

If all of this sounds daunting, then variable life is probably not the right choice. But if the prospect of managing your life insurance policy’s cash value in the style of your own personal mutual fund sounds appealing – if you’re energized by the idea of having more control over the investment allocation of the policy’s cash value, while being able to pursue higher long-term growth without the limitations of a traditional whole life policy, then variable life might be right for you.

The other type of variable life – variable universal life – is a good option for people who want control over all aspects of their life insurance policy. Variable universal life policies allow policyholders to choose from a wide range of investment options (like variable life) while also enabling policyholders to adjust the size and timing of their premium payments, lower or increase the amount of their policy’s death benefit, boost the size of the cash value or draw down the cash value to pay premiums.

Variable universal life insurance is a good choice for policyholders who have the discipline and knowledge to manage the details of their insurance policy while also managing the policy’s investment component. This type of policy will evolve to suit the changing needs of the policyholder, while also offering the potential for the highest long-term growth in the cash value.

With flexibility and growth potential comes responsibility. Variable universal life policies require people to be more involved in managing their policies and reading all of the fine print. If too many payments are missed, the cash value might drop below the allowable level, resulting in a lapse of death benefit coverage. There are optional riders available, like the “No Lapse Guarantee” that can help policyholders avoid falling into this situation.

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