Variable life insurance is a type of permanent life insurance that provides coverage for the entirety of the policyholder's life, as long as premium payments are maintained.
Variable life insurance is a type of permanent life insurance that provides coverage for the entirety of the policyholder's life, as long as premium payments are maintained. The key difference between variable life insurance and other types of permanent life insurance is that the cash value component of a variable life insurance policy is invested in a variety of securities, such as stocks and bonds, rather than being placed in a fixed account. This means that the cash value of the policy can fluctuate based on the performance of the underlying investments.
Advantages OF Variable Life Insurance
Main advantages of variable life insurance is the potential for higher returns on the cash value component of the policy. Because the cash value is invested in securities that have the potential to grow in value, policyholders have the opportunity to earn a higher return than they would with a traditional fixed account. Additionally, policyholders have the ability to select the specific investments that their cash value is invested in, which can align with their own personal investment goals and risk tolerance.
However, it's important to note that with the potential for higher returns comes the potential for higher risk. The value of the cash value component of a variable life insurance policy can fluctuate based on the performance of the underlying investments, which means that it can decrease in value as well as increase. Policyholders should be aware of this risk and be comfortable with the potential fluctuations before purchasing a variable life insurance policy.
Another advantage of variable life insurance is that the policyholder has the ability to adjust the death benefit of the policy as their needs change over time. This flexibility allows the policyholder to increase or decrease the death benefit as necessary, which can be useful for those with changing family or financial situations.
Option Of Riders
Variable life insurance policies also have the option of riders, which are additional features that can be added to the policy for an additional cost. These riders can include things like accidental death coverage, long-term care coverage, and waiver of premium coverage.
It's important to note that variable life insurance policies are considered securities by the Securities and Exchange Commission (SEC) and as such, are subject to the same regulations as other securities. This means that variable life insurance policies are only available through licensed insurance agents who have passed the appropriate securities exams.
How does the death benefit work in a variable life policy?
A death benefit is money that is paid to your family when you die. When purchasing variable insurance, you choose a denomination. This is your death benefit amount (eg $500,000).
Every time you pay a premium, a portion of the payment goes toward the cost of maintaining the death benefit, which is made available to the beneficiary. The rest of the premium will be used to build a cash account.
Depending on the death benefit option chosen when purchasing the policy, the beneficiary may also receive the face value plus the cash value of the account or the face value plus the premium.
Here is an example.
Suppose he paid $50,000 in variable life insurance premiums. And your Cash Value account is worth $75,000. If the face value of the policy is $500,000, depending on the death benefit option chosen, the beneficiary will receive one of the following benefits:
Based on face value only:
$500,000
Based on principal and cash value of the account:
$575,000 ($500,000 + $75,000)
Based on notional and premium payments:
$550,000 ($500,000 + $50,000)
You will find that you have options when it comes to variable insurance. But not everyone likes the uncertainty of these options.
4. How do I get out of variable insurance?
If you change your mind about life insurance, you can cancel (surrender) your variable life insurance. If you stop paying premiums without contacting your life insurance agent, your policy will expire and you will be charged a cancellation fee. The best way to cancel a policy is to first consult with your insurance agent to find out what cancellation options are allowed.
If you cancel your policy within his first 10 days of purchasing your variable insurance (this period varies by insurance company and state), you will generally not be charged a cancellation fee. Instead, premiums already paid will be refunded.
If you cancel after the freelook period (as it is actually called in the insurance industry), you will most likely be charged a redemption fee.
5. What is the difference between variable and whole life insurance?
As previously mentioned, variable life insurance is a type of life insurance. While both are investments with cash value, the mechanics of the investment opportunities are very different.
First, let's look at life insurance. With endowment insurance, the insurer decides where and how money is invested in the call money account. This is a much more conservative type of life insurance.
Variable insurance, on the other hand, makes investment and asset allocation decisions. This means you need a solid understanding of how investments such as stocks, bonds and mutual funds work. Ultimately, you are responsible for winning or losing.
6. What is the difference between variable life insurance and term life insurance?
As you probably guessed, we're not fans of variable insurance. But we are big fans of term life insurance. Let's compare the two. We have already mentioned that variable life insurance is no-risk, no-reward life insurance. But that's just the tip of the iceberg. Management fees associated with variable life insurance investment options are very high. Not only that, but the fees are automatically deducted from your cash account. Also, if you don't have enough money in your call money account, your money will be recovered through premium increases. What if you can't swing a higher premium? Get ready to see the policy expire. Oops!
Think about it. You make monthly payments to keep your life insurance policy in force and are hired by an insurance company to manage your investment in your policy. pain!
Term life insurance is much cheaper than variable life insurance for the same death benefit. Term insurance is just life insurance. No cash value accounts with expensive investment or management fees.
And because you're saving on life insurance, you'll have more money to invest in a retirement account like a 401(k) or Roth IRA. How to build real wealth by taking care of your life insurance!
In conclusion
Variable life insurance is a type of permanent life insurance that offers the potential for higher returns on the cash value component of the policy through investment in securities. Policyholders have the ability to select the specific investments that their cash value is invested in, and can adjust the death benefit as their needs change. However, it's important to be aware that the cash value can fluctuate based on the performance of the underlying investments, and that variable life insurance policies are considered securities by the SEC.
It's always important to consult a financial professional to determine if this type of life insurance policy is right for you and to help you understand the potential risks and benefits.
