Permanent life insurance policies that include both a cash value component and a death payment are known as variable life insurance policies. Variable life insurance policies provide for the possibility of higher returns by allowing the cash value to be invested in a range of sub-accounts, much like mutual funds, in contrast to typical whole life insurance. This adds a risk element, too, as the death benefit and cash value are subject to change depending on how well these investments perform.
How Does Variable Life Insurance Work?
Variable life insurance is a kind of permanent life insurance that combines a death benefit with an investment. Here’s a quick rundown of how it functions:
1. Organization and Premiums
A variable life insurance policy requires you to pay premiums on a regular basis. These premiums go toward the policy’s cash value account, with the remaining portion going toward insurance expenses.
2. Investments and Cash Value
Like mutual funds, the cash value is invested in sub-accounts that may contain equities, bonds, and money market funds. These investment choices provide the possibility of increasing cash value in response to market performance. The policyholder has the option to select and modify the sub-accounts to which their cash value is allocated, as needed.
3. Death Benefit
Upon the insured’s passing, the insurance pays beneficiaries a death benefit. In contrast to conventional whole life insurance, a variable life policy’s death benefit is subject to change. The cash value and death benefit may rise if the investments do well. On the other hand, even though the majority of plans have a minimum death benefit that is guaranteed, subpar investment performance can lower the cash value and perhaps the death benefit.
4. Policy Management
Within the insurance, policyholders are free to handle their investments as they see fit. They are able to move investments across sub-accounts without facing any immediate tax repercussions. Monitoring is necessary for this active management in order to avoid risk and enhance growth.
5. Advances and Retractions
Policyholders are able to take withdrawals or borrow against the cash value. Interest must be paid back on loans, and the death benefit will be reduced if there are any unpaid loan balances when the insured passes away. Redrawals may also result in a reduction of the death benefit and monetary value.
6. Tax Advantages
Because the growth of the cash value is tax-deferred, no taxes are due on the gains on the investment until the money is taken out. Furthermore, recipients often get the death benefit tax-free.
Read More: What Is Dependent Life Insurance?
Three Advantages of Variable Life Insurance
1. Possibility of Greater Profits
The possibility of increased returns on the cash value component is one of the main advantages of variable life insurance. Similar to mutual funds, policyholders can invest the cash value in a range of sub-accounts, giving them the chance to make sizable returns depending on market performance.
Example: Assume Steve purchases a variable life insurance policy and invests a portion of his cash value in technology stocks that perform well in a sub-account. These equities rose dramatically over a number of years, greatly boosting the policy’s cash value. Because of this, Steve stands to gain from both a higher cash value and possibly a larger death benefit for his beneficiaries.
2. Flexibility in Investing
Policyholders with variable life insurance have the freedom to select and modify their investments within the policy. This enables people to adjust their investing plan in accordance with their financial objectives and risk tolerance.
Example: When Jennifer, the policyholder, first buys her variable life insurance policy, she first invests her cash value in conservative bond funds. She reallocates her savings to more aggressive equities funds in an attempt to boost returns as she grows more at ease with investing and as her tolerance for risk rises. Jennifer is able to maximize the growth potential of her policy over time by having the flexibility to change investments.
3. Tax Benefits
A number of tax advantages are provided by variable life insurance. Due to the tax-deferred growth of the cash value, policyholders do not have to pay taxes on their investment profits until they take their money out. Furthermore, recipients often get the death benefit tax-free.
Example: David has a considerable cash value in a variable life insurance policy that has increased over time. In order to pay for his child’s college tuition, he chooses to take out an insurance loan. The loan is not taxable income since it is secured by the cash value of the policy. Furthermore, David’s beneficiaries receive a sizable amount of financial assistance after he passes away because they do not have to pay income taxes on the death benefit.
Who Should Consider Variable Life Insurance?
These investments have the potential to grow as well as the danger of losing money, and their value may change depending on how well the selected investment alternatives perform. It is critical to determine who would profit most from this kind of insurance due to its intricacy and investment component.
1. Those with Investment Intelligence
Variable life insurance suits those who have a solid grasp of investing methods and financial markets. The policyholder is required to make well-informed choices on the distribution of cash-value investments. This policy may be appealing to those who are risk-takers and want to actively manage their assets because it has the potential to yield larger returns than more conventional life insurance plans.
2. High Net Worth People
For high-net-worth people seeking to provide for their beneficiaries and diversify their financial portfolio, variable life insurance might be very advantageous. One attractive characteristic is the cash value component’s tax-deferred growth, which permits wealth creation over time without immediate tax consequences. The death benefit can also be used as an estate planning strategy to guarantee a seamless transfer of wealth and reduce inheritance taxes.
3. Long-Term Financing Experts:
Variable life insurance may be of interest to those who place a high priority on long-term financial planning and are searching for a flexible insurance option that may accommodate shifting financial conditions. It’s a flexible choice for people with long-term financial objectives, like saving for retirement or paying for a child’s education, because you may modify the death benefit and premium payments in addition to the investing component.
Variable Life Insurance vs. Variable Universal Life Insurance
Variable Life Insurance
Permanent life insurance with a death benefit and a cash value component is known as variable life insurance. Like with mutual funds, the cash value can be invested in other independent accounts, potentially yielding larger returns depending on how the market performs. Investment decisions are at the discretion of policyholders, and the investments made may cause changes in the value of the policy. For people who have a strong grasp of financial markets and are prepared to assume investment risk, variable life insurance is therefore a good fit.
Variable Universal Life Insurance
Variable universal life (VUL) insurance blends the flexibility of universal life insurance with the characteristics of variable life insurance. Just like variable life insurance, variable universal life (VUL) plans have a cash value component that may be invested in various accounts. On the other hand, VUL plans give policyholders more flexibility since they let them modify their premium payments and death benefits over time.
According to their financial status and aspirations, policyholders can, therefore, raise or lower their premiums and death benefits. For those who want to have greater influence over the terms of their insurance coverage, VUL is a desirable alternative because of its flexibility.
Important Distinctions and Topics to Think About
Flexibility: The main distinction between VUL and variable life insurance is the degree of flexibility offered in terms of both death benefits and premium payments. While VUL plans allow for changes, variable universal life (VUL) policies have set premiums and death payments. This increases VUL’s flexibility in response to shifting financial conditions, which may be a big benefit for people looking for individualized insurance plans.
Control of Investments: Through a number of distinct accounts, both variable life insurance and VUL plans provide the possibility of investment development. Policyholders must, however, feel confident handling these assets and aware of the hazards involved. The danger of market volatility, which can impact the cash value and, in turn, the policy’s overall advantages, accompanies the possibility for larger returns.
Charges and Fees: Comparing these sorts of plans to more conventional life insurance alternatives usually results in greater costs and expenses. These may comprise management fees for the investment accounts, administrative fees, and costs related to the insurance policy itself. Prospective policyholders must carefully examine these expenses and assess how they will affect the long-term worth of the policy.
Selecting the Appropriate Policy: Individual financial objectives, risk tolerance, and flexibility preferences all play a role in choosing between variable life insurance and variable universal life insurance. Variable life insurance may be more appealing to people who are comfortable with investment risk and would rather have a set premium structure. On the other hand, VUL could be a better option for people who think they will need to modify their death benefits or premiums over time. Making an informed choice that supports long-term financial goals might be aided by speaking with a financial counselor.
Also Read: How to Choose a Financial Advisor?
Where To Buy Variable Universal Life Insurance?
There are several platforms available for purchasing Variable Universal Life (VUL) insurance, and each one has its own advantages and features. The following five sources allow you to purchase VUL insurance:
1. Insurance Companies
VUL insurance coverage is provided by well-known insurers such as Prudential, Nationwide, and MetLife. You may be confident that the plans you purchase directly from these providers are supported by solid financial ratings and a track record of dependability. These businesses frequently have comprehensive websites where you may obtain prices, compare various VUL products, and even submit an online application. They also give you access to certified representatives who can assist in customizing a policy to meet your specific requirements.
2. Insurance Brokers
Customers and the insurance firms are connected through middlemen, such as SelectQuote or Policygenius. A greater variety of VUL policies from different insurers are available to brokers, enabling them to offer a more comprehensive comparison of products. This might assist you in finding the greatest coverage at a cost that is reasonable. In addition, brokers may help in deciphering the nuances of various VUL policies and provide tailored guidance.
3. Financial Advisor
VUL insurance is provided by financial advice businesses such as Edward Jones, Fidelity, and Vanguard as a component of their financial product line. A financial advisor’s recommendation for VUL insurance might be advantageous as they take your long-term objectives and overall financial status into account. They are able to incorporate your VUL policy into a thorough financial plan and make sure that it complements both your retirement and investing strategies.
4. Online Marketing Platforms
Marketplaces for life insurance, including VUL policies, are offered online by platforms including eFinancial, Haven Life, and Quotacy. These platforms make it easy and quick for you to compare quotes from several insurers. To assist you in comprehending policy specifics and making defensible judgments, they frequently provide easily navigable interfaces and online resources. In addition, a few of these platforms offer customer support agents to address any queries and help with the application procedure.
5. Credit Unions and Banks
Customers of several banks and credit unions, including USAA and Wells Fargo, can purchase VUL insurance plans. If you already have a relationship with a bank or credit union, purchasing VUL insurance through them may be advantageous since they may provide special prices or advantages for current clients. Furthermore, financial consultants who are on staff at banks and credit unions can offer direction and assistance during the buying process.
Conclusion
For people wishing to protect their finances while building their assets, variable life insurance is an appealing option since it provides a special blend of lifetime coverage and investment opportunities. Because of the investment component, there are expenses and risks associated with it, and there may be variations in the death benefit and cash value. As a result, it’s critical to fully comprehend these elements and determine if they fit with your risk tolerance and financial goals. To ensure that variable life insurance is the best option for your unique requirements and circumstances, speaking with a financial adviser or insurance expert may offer insightful advice and assist you in making an educated selection.
FAQs
What Distinguishes Whole Life Insurance from Variable Life Insurance?
Although both are long-term life insurance plans, variable life insurance permits subaccount investments, potentially yielding greater profits. Generally, whole life insurance provides less investing choice but a guaranteed increase in cash value.
Can Variable Life Insurance Cause You to Lose Money?
Yes, the value of the cash may change depending on how the market performs because it is invested in sub-accounts. Reduced death benefit and cash value can be the outcomes of poor investment performance.
What Happens If My Premium Payments Are Stopped?
The coverage will terminate if payments are not made, causing the policy to expire. As long as there is enough cash value available, certain plans’ clauses do, nevertheless, permit premium payments to be covered by the cash value.
Can I Change What I’ve Invested if I Have a Variable Life Insurance Policy?
Absolutely, switching between sub-accounts is often tax and fee-free for policyholders, enabling them to modify their investing strategy over time.
Do Policy Withdrawals and Loans Incur Taxes?
Although withdrawals from policies may be subject to taxes if they exceed the total amount of premiums put into the policy, policy loans are often not. Furthermore, the death benefit may be decreased by withdrawals and loans.