Variable life insurance is a type of permanent life insurance policy that combines a death benefit with an investment component. It offers policyholders the opportunity to invest their cash value in a range of investment options, such as stocks, bonds, and mutual funds, allowing for the potential for higher returns compared to traditional whole life insurance. Here are the key features and characteristics of variable life insurance:
1. Lifetime Coverage: Like other permanent life insurance policies, variable life insurance provides coverage for the entire lifetime of the insured person, as long as the policy remains in force.
2. Death Benefit: Variable life insurance offers a death benefit that is paid out to the beneficiaries upon the insured person’s death. The death benefit is typically a minimum guaranteed amount plus any additional amount that may result from the performance of the investments chosen by the policyholder.
3. Premium Payments: Policyholders pay regular premiums, which cover the cost of insurance (mortality charges), administrative fees, and other expenses associated with the policy.
4. Cash Value Component: Variable life insurance policies have a cash value component, which functions as an investment account. The policyholder can allocate the cash value to a variety of investment options, often referred to as “subaccounts” or “separate accounts.” These investment options can include stocks, bonds, and mutual funds.
5. Investment Risk: The primary distinguishing feature of variable life insurance is the investment risk borne by the policyholder. The cash value’s growth or decline is directly linked to the performance of the chosen investments. If the investments perform well, the cash value may increase, potentially leading to a higher death benefit. Conversely, poor investment performance can lead to a lower cash value and death benefit.
6. Flexibility: Variable life insurance offers flexibility in choosing how the cash value is invested among the available investment options. Policyholders can reallocate their investments over time to align with their risk tolerance and financial goals.
7. Transparency: Policyholders receive periodic statements detailing the performance of their investment subaccounts, giving them insight into the growth or decline of the cash value.
8. Policy Loans and Withdrawals: Like other types of permanent life insurance, variable life insurance policies typically allow policyholders to take out loans against the cash value or make withdrawals. However, any unpaid loans will reduce the death benefit.
9. Tax Advantages: The cash value component of variable life insurance policies can grow tax-deferred, meaning you won’t pay taxes on the gains until you make withdrawals or surrender the policy.
10. Potential for Higher Returns: Variable life insurance policies offer the potential for higher returns compared to traditional whole life insurance due to the investment component. However, this also means that policyholders assume investment risk, and there are no guarantees of cash value growth.
Variable life insurance is suitable for individuals who are comfortable with investment risk and want a life insurance policy that provides the potential for higher returns. It can be used for various financial goals, including income replacement, estate planning, wealth transfer, and retirement planning. However, it’s crucial to carefully consider your risk tolerance, investment strategy, and the policy’s terms and costs before purchasing variable life insurance. Consulting with a financial advisor can help you make an informed decision based on your specific financial needs and objectives.