Variable Life Insurance Pros and Cons

Overview

The biggest advantage of variable life insurance is that it allows policyholders to choose from a variety of ways to invest the cash value of their insurance policies – similar to a mutual fund, variable life insurance policy cash value can be invested in stocks or bonds, with a variety of options depending on the insurance company.

The main disadvantage to variable life insurance is that it presents greater risks to the policyholder – just like any other investment, performance can fluctuate depending on the markets. Variable life insurance brings bigger risks than a standard whole life insurance policy, but it also offers the potential for bigger rewards.

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Variable Life Insurance Pros

Investment Options

Unlike other forms of permanent life insurance, which only offer slow-growing cash value accounts, variable life insurance enables policyholders to invest their cash value in a variety of stock and bond funds.

Higher Growth Potential

With whole life insurance and universal life insurance, the cash value grows slowly at fixed rates of interest. Policyholders who are impatient with this slow rate of growth and who want to put their cash value to work can explore higher potential investments with variable life insurance. 

Guaranteed Death Benefit

Although variable life insurance has certain risks due to the volatility of stock and bond markets, one element of a variable life insurance policy that is not at risk is the death benefit. All variable life insurance policies have guaranteed death benefits that will always provide a fixed level of protection to the policyholder’s beneficiaries – no matter what happens to the cash value of the policy, the death benefit will stay the same.

Fixed Payments

Unlike universal life insurance, variable life insurance policies are set up with a fixed premium payment schedule – payments are guaranteed never to increase and are always due at the same time each month (or each quarter). This provides consistency and discipline and creates a “forced savings” effect, which is especially beneficial to policyholders using their variable life insurance policies as investment vehicles. 

A True Investment

Other permanent life insurance products like whole life and universal life have a cash value component, but they are not “investments” in the sense of offering substantial long-term growth. Variable life insurance allows policyholders to harness the earning power of their cash value, just as they would with any long-term investment for retirement, college savings or other lifelong goals.

Works Like a Mutual Fund

The cash value of a variable life insurance policy is invested in an assortment of separate accounts – stocks and bonds, depending on the offerings of the insurance company. This enables the policyholder to direct the investments of the policy’s cash value depending on the policyholder’s overall financial goals, and helps ensure that the insurance policy cash value can reflect the rest of the policyholder’s financial portfolio.

Permanent Coverage

Variable life insurance is a form of permanent life insurance coverage, meaning it covers the policyholder for the entire duration of that person’s life. This is different from term life, which only covers a defined timeframe of years. Variable life insurance allows policyholders to have the financial protection of permanent life insurance coverage while also having the high growth potential of other long-term investments.

Variable Life Insurance Cons

Greater Risk

While it’s true that variable life insurance offers the possibility of higher returns on investment of the cash value, there is also investment risk: the cash value can go up or down, depending on the markets. Policyholders need to be familiar with their level of risk tolerance before buying a variable life insurance policy.

Non-Guaranteed Cash Value

The cash value of a variable life insurance policy is not guaranteed – it can go up, it can go down, it could even go to zero (if things went very badly in the stock market). Buying a variable life insurance policy is not like putting money into an FDIC-insured bank account. There is a level of investment risk that every policyholder needs to understand before they buy a variable life insurance policy.

Investment Options Vary Widely

Investment options vary by the insurance company – some companies have a huge array of choices, while others only have two or three stock and bond funds to choose from. Do careful research and review the fund prospectus before committing to a variable life insurance policy. A good insurance company should provide sufficient options to suit the investment style of almost any policyholder; and if not, it might be time to look elsewhere.

More Complicated

Variable life insurance is ideal for savvy investors who are willing to assume the risks. Many policyholders might not feel comfortable taking such an active role in managing their insurance policy cash value – and these people might be better off with whole life insurance.

Variable life insurance offers the possibility of greater rewards, but also higher risks to the policyholder. People who buy variable life insurance tend to be savvy investors who are not afraid of investment risk; rather than watch their cash value accumulate low amounts of interest, they want to be more aggressive in managing that money for long-term growth.

Before buying variable life insurance, policyholders must feel comfortable with their ability to choose the right investments for their needs, and also should feel confident that they can handle the risks involved.

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