What is Variable Life Insurance?
A variable life policy is a permanent policy, so it is similar to whole life. It has an insurance account and a savings or investment account. Traditional whole life policies may also have a cash value, and this cash value can grow because of interest or dividends. But a policy owner has little control over the cash value of a whole life policy. It will grow by some present interest rate or market index, but that cash is managed by the insurer that issues the policy.
In contrast, a variable life policy has investment accounts with a selection of funds that the policy owner can select and change. So the owner has some control over how that cash is managed. These may be equity, mutual, or money market funds.
Variable Life Means Control and Risk
So the policy owner has more control. But they also take on more risk. In good years, when the funds rise, the value of the money accounts may grow. This may increase the value of the cash portion, and it may even be used to pay the policy premiums.
In down years, the reverse may be true. If the cash value declines, the premiums can get more expensive too. There has to be money to pay the premiums in order to keep the life insurance in force.
In general, there may be a threshold that is guaranteed to help manage this risk. There could be a minimum death benefit that is pre-defined in the policy. There could also be a minimum that is guaranteed by the insurer for the value of the cash accounts. It is important to fully understand your policy before you buy it!
Pros and Cons of Variable Life Insurance Policies
- The owner has more control over the performance of the cash account. They can choose between funds and change the allocation at will.
- If the cash account does grow, the owner should not be taxed on the gain unless they sell the policy.
- A lot of life insurance proceeds or gains are not taxed. Beneficiaries can usually collect the death benefit without being taxed on it.
- There is risk! The funds could decline in value. This means the cash account could decline, and it also means the premiums could get more expensive! Note that some policies have guaranteed thresholds to minimize this risk.
How To Learn More About Variable Life Insurance Policies
These policies can be a bit more complicated than the traditional types of life policies you are used to. This is because they combine some elements of insurance and investments. You have some potential for gain and tax advantages, but there is also some risk.
Since policies that are on the market, and of course, insurance rates, will be different in different local areas, you need to find a qualified local variable insurance broker to help you understand your choices. You can find some online life insurance quote forms to help you compare insurers. These forms will also give you the contact information for local brokers who are eager to help you find the best solution.