What are the characteristics of a variable life insurance?

What Is Variable Life Insurance?All variable life insurance policies have three main components:Death benefitCash valuePremiumsWhen you pay your monthly or yearly premiums, part of

What are the characteristics of a variable life insurance?

What Is Variable Life Insurance?All variable life insurance policies have three main components:

  • Death benefit
  • Cash value
  • Premiums

When you pay your monthly or yearly premiums, part of the money goes toward the cost of insurance and administrative fees.

The rest goes toward the policys cash value, which is invested into sub accounts, similar to mutual funds. You get to choose which sub accounts you want to invest in.

You can withdraw or borrow against your policys cash value.

Your policys cash value grows tax-deferred over time, which means you typically wont pay taxes on investment gains so long as they remain in your account.

When underlying investments perform well, the policys cash value has higher growth potential than other insurance options.

However, when the market performs poorly, your policys cash value can decrease.

This may also reduce the death benefit your heirs receive, depending on how your policy is structured.

Variable life insurance is regulated like a security because it exposes consumers to potential market risk.

Finally, like all forms of life insurance, variable life policies pay a specific amount of money  known as the death benefit  to your beneficiaries after you pass away.

You may select a level death benefit to ensure your beneficiaries receive the policys face value when you pass away. However, they will not receive any money left in your cash value.

For an additional cost, you can structure your variable life insurance policy to pay your beneficiaries the face amount of your policy plus its cash value after you die.

Ask the insurance company or agent for a copy of the policys prospectus. This free document provides important details about the variable life insurance policy, including fees and expenses, investment options and death benefits.

Josh Curtis, founder and lead investment advisor of Clarity Financial LLC, explains your options with index or variable life insurance.

Variable vs. Variable Universal Life

The cash value of variable universal life insurance policies can be used to pay premiums.

As with universal life insurance, a variable universal life policyholder can adjust the size and frequency of premium payments  within certain limits.

This flexibility is one of the key features of variable universal life policies.

Meanwhile, traditional variable life insurance features fixed premium payments over the life of the policy and more death benefit guarantees.Basic Features of Variable Life and Variable Universal Life

  • Cash value accounts linked to investment options offered by the insurance company.
  • Control over selecting the investment options.
  • Cash value can fluctuate due to the performance of investments.
  • The death benefit may also fluctuate, depending on how your policy is structured.
  • Governed by the U.S. Securities and Exchange Commission.
  • Cash value grows on a tax-deferred basis.

Benefits and Drawbacks of Variable Life Policies

Variable life insurance provides a unique opportunity to combine insurance coverage with an investment component.Benefits of variable life insurance include:

  • Potential for higher cash value growth
  • Control over investments
  • Tax advantages

However, variable life tends to be more complicated than other life insurance options, such as term life insurance.

Its important to understand the drawbacks as well as the advantages of this policy type before making a decision.Disadvantages of Variable Life InsurancePolicy LapseIf you do not maintain enough money in your cash value to cover policy fees and expenses, your policy may lapse and terminate. This can happen if you miss premium payments or make poor investment choices. If your policy lapses, your beneficiaries will not receive any death benefit.Fees and ExpensesVariable life insurance policies tend to have more fees and expenses than other permanent life insurance options. They also have higher premiums than term life insurance.Investment RiskVariable life insurance exposes you to market risk and volatility. As the U.S. Securities and Exchange Commission notes, you can lose money in a variable life insurance policy. Each fund you invest in comes with its own management fees and unique risks. Make sure you understand how each fund works before investing.

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