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Variable life insurance policies stand out for their investment component. As a policyholder, you can control the way your cash value is invested, but there are no guarantees on return.
Variable life insurance is a permanent policy that builds cash value over time — and a portion of that cash value is invested in the market. Your provider will present you with a portfolio of stocks, bonds and mutual funds to choose from, and you can allocate your funds accordingly.
While the investment is professionally managed by the insurance company and may boost your returns, your money is subject to the ups and downs of the market. For this reason, variable life insurance is considered a security, and is the only kind of policy that’s sold with a prospectus.
Like other permanent policies, variable life insurance offers lifelong protection as long as you keep up with your premiums, plus the ability to take out a loan against your policy. The premiums are adjustable, and the policy pays out a tax-free benefit to your beneficiaries when you die.
The amount your beneficiaries receive depends on the performance of your investments. There isn’t a guaranteed minimum rate of return.
As the name suggests, variable universal life insurance is a hybrid of variable and universal life insurance. With this policy, you can invest in the market and change the amount and frequency of your premium payments. The key difference is how you pay your premiums. You can choose to make a larger lump sum payment within the minimum and maximum limits, or use your accrued cash value to cover your premiums. This is why these policies are sometimes referred to as flexible premium variable life insurance.
Let’s say your premium is $400 per month. Once your cash value hits a certain number, you can opt to pay $100 out of pocket and use your cash value to pay the rest.
Variable life insurance is unique when it comes to the way the cash value is invested.
Every time you pay your premium, a percentage of it will go toward the cash value of your policy. That cash value will then be invested in a number of sub-accounts. Think of these sub-accounts as mutual funds: They’re managed by your insurer and you wouldn’t be able to invest in them outside of the variable life insurance policy.
Since the cash value is an investment, it carries a degree of risk. It can and will fluctuate with the market. If you purchase variable life insurance, you need to be comfortable with bearing that risk, as it may affect the death benefit as well as the amount of money you can borrow against your policy while you’re alive. You can surrender your policy to collect the cash value, too.
Like all life insurance policies, your beneficiaries will receive a death benefit when you pass away.
Once you’ve accumulated enough cash value, you can begin taking loans against your policy. The amount you can borrow varies, but many insurers will allow you to withdraw up to 90% of the cash value amount. The loan is tax-free and charged at a lower interest rate than traditional loans — but if you don’t pay it off, your insurer will dip into the death benefit when you die. This means your beneficiaries may not receive as much money as you intended to leave them.
Variable life insurance could be an attractive choice for these reasons:
These drawbacks may sway your decision:
For the average person, variable life insurance isn’t the best life insurance or investment product. While there’s potential for significant growth, the returns aren’t guaranteed.
Variable life insurance is best suited to high-income earners with a high risk tolerance to match, as well as people who want to make the most of the policy’s tax advantages.
If you only need coverage for a set period of time, look into term life insurance. The cheapest and simplest type of coverage, these policies have steady premiums and don’t feature a savings or investment component.
If you need lifelong protection or want your policy to build cash value, you could explore:
Variable life insurance policies suit those who have a high risk tolerance and a good understanding of what’s happening with the market. Along with providing lifelong coverage, these policies offer flexibility and the potential for rapid growth — but there’s no guarantee when it comes to returns.
Before signing off, compare life insurance companies to make sure it’s the right fit for you and your family.
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