Variable Life Insurance

A variable life insurance policy is a contract between you and an insurance company. In exchange for a premium the insurance company promises to pay specified amount to your beneficiaries upon your death. In this article, we will go over the basics of variable life insurance.

The Basics

Variable insurance differs from whole, term, and universal life. It carries a cash value. This cash value will vary according to the size of the premiums you pay, fees and expenses, and how your investments under the policy perform. You have the ability to potentially increase your cash value by placing your money in investment options the policy offers, which are usually mutual funds. You can also allocate part of your premium towards a fixed account that will pay a set rate, usually offering a guaranteed minimum.

Key Risks

As with all financial products, there are risks involved in purchasing a variable life insurance policy. First, variable life insurance is not meant to be a short-term savings vehicle. It is meant to provide a future death benefit for your loved ones, and it can help you meet other long-term financial objectives. Second, there’s the potential for your policy to lapse. If you do not keep a sufficient cash value, the insurance company will terminate your policy without value or a death benefit. Third, the fees and expenses involved in policy upkeep can be substantial. Fourth, as with all investments, there is the risk of loss depending on the performance of your chosen investments. Lastly, you need to be careful about what insurance company you choose. If the company is not in good financial standing they may not be able to meet their obligations.

Policy Loans

You can take out a portion of the cash value of a variable life insurance policy without incurring surrender charges or federal taxes. There are some caveats you need to be aware of. First, the loan will reduce your cash value and if it remains unpaid it has the potential to also reduce your death benefit. Second, taking a loan should be planned carefully as it can increase the likelihood of a policy lapse. Then if your policy does lapse your loan may be considered taxable for federal tax purposes. You also will have to pay interest on the amount borrowed.

Optional Features

Variable life insurance policies also offer optional features, known as riders. They can provide added benefits, but there are fees associated with them. Some of these riders include:

• No Lapse: This rider will keep your policy from lapsing even if your cash value is not sufficient to pay for policy charges. However, utilizing it may reduce your death benefit.
• Disability Rider: With this add-on, it will allow you to keep your policy in effect if you become disabled and cannot pay your premiums.
• Accelerated Death Benefit: This optional feature will allow you to pay out a portion of your death benefit to yourself while you are alive if you become chronically or terminally ill.
• Long Term Care Insurance: This rider will help cover the cost of long-term care.
• Income Benefit: With this optional feature you or your beneficiaries can receive monthly income from your policy for a set period.
• Additional Term Insurance: This allows you to purchase additional term coverage to increase your death benefit.
• Accidental Death Benefit: With this rider, if your death is the result of an accident your beneficiaries will receive an additional death benefit.

Purchasing Variable Life Insurance

If the risks of variable life insurance seem worth the rewards, meet with your insurance agent to being looking at policy options.

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