Variable Life Insurance 101
If you are raising a family, you may be wondering what you can do to provide for them financially in case something happens to you. Purchasing life insurance is a way to ensure that your family has the means to support itself in the event that you die.
There are many different life insurance products available on the market today. When weighing the pros and cons of each type of plan, many people consider a variable life insurance policy. Below we discuss variable life insurance in greater detail.
What is Variable Life Insurance?
Under a variable life insurance policy, designated beneficiaries will receive a benefit payout upon your death. As with other life insurance products, you decide what the death benefit payout should be. You will be required to pay in monthly premiums, which are based on a number of factors including age, health, gender, and lifestyle.
Variable life insurance policies are permanent, which means that as long as you pay your premiums, the policy stays in effect. It will end upon your death.
What do I need to know about Variable Life Insurance?
While variable life insurance policies share many similarities with other life insurance products, they do have some different features, as noted below.
Cash value – Variable life insurance policies have a cash value. This means that a portion of your monthly premium payment goes toward the insurance and a portion goes toward a savings account, which is similar to a whole-life policy.
Where it differs from a whole-life policy is how the cash value is invested. Rather than receiving an interest payment on the balance in the savings account, a policy holder is given the choice to invest in a variety of investment options similar to mutual funds, bonds, equities, and money market funds. These are often referred to as sub-accounts. These investments typically earn a greater return than what you might receive in interest. When the market is performing well, this allows the cash value to grow faster than other types of insurance policies. In some cases, a life insurance company may place a cap on the growth of the investments. If the market is underperforming, the cash value of your variable life insurance policy could fall.
Death benefit - A variable life insurance policy typically provides benefits as either a level death benefit or the policy value plus its cash value payout.
- Level death benefit - The amount paid out upon death is what the policy states.
- Policy plus cash value – This will pay out the amount of the policy plus any cash value. Premiums under this type of plan will be higher than what is paid under a level death benefit plan.
Premium payments - Premiums can be increased if the investment portion of your policy isn’t performing as well as expected. The insurance company may raise your premiums to accommodate for the drop in the cash value.
Fees – The fees that you pay under a variable life insurance plan will be higher than most other types of insurance policies. This is due to each fund that the cash value is invested in carries with it a management fee.
Should I buy Variable Life Insurance?
A variable life insurance policy might be a good option if you are looking for a life insurance policy that has the potential to produce a higher return. As it builds up a cash value, you could borrow against this or withdraw the funds as needed.
The downside to a variable life insurance policy is its cost. Monthly premium payments are higher than other types of life insurance, such as term-life. Both policies can have the same death payout, yet you will pay significantly less in premiums for a term-life policy than a variable life insurance policy. With its cash value tied to the performance of the investments that you’ve chosen, you could experience a drop in value if returns aren’t as high as expected. If the cash value drops low enough, your monthly insurance premiums could rise.
While there are many benefits with a variable life insurance policy, they are costly plans. If you are unable to keep up with the premiums, going with a term –life policy may be more cost-effective for your family. The policy can have the same death benefit payout as a variable life plan, but at a much lower monthly premium that will remain the same throughout the policy period.