Understanding Variable Life Insurance

In spite of its inevitable nature, death is a subject most of us avoid discussing until we experience a loss. And yet, failing to take into account the potential ramifications of one's passing on loved ones and overlooking the importance and necessity of life insurance can have adverse consequences on those left behind, leaving them to cope not solely with the grief but also the financial complications. A life insurance policy enables individuals to avoid such a scenario and offers peace of mind by protecting dependents against the former's premature death. It serves as a wage replacement as well as provides liquidity and a sound monetary plan for heirs, ensuring that they are provided for in the event that the insured does not reach retirement age.

What is Variable Life Insurance?

Also referred to as 'adjustable' life insurance, this type of cash policy is a flexible form of permanent life insurance that combines an investment component with a death benefit. It allows the insured to accumulate tax-free cash in a low-risk investment portfolio, which in turn enables him or her to increase assets for retirements while providing for family members upon his or her death. Variable life insurance pays a death benefit and provides permanent protection to the plan's beneficiary or beneficiaries

Investment Aspect of Variable Life Insurance

Policy owners can choose to invest a portion of their premium in an investment account consisting of funds offered by the insurer. This provides policyholders with an opportunity to increase their cash value. They may select from a wide range of investment vehicles including money market funds, stocks, bonds, international equity, indexed equity, managed equity, real estate funds or a selection thereof. Some variable life insurance companies offer strictly in-house funds, while others provide exclusively external funds and still others offer a blend of both. The insured can decide whether to decrease or increase the amount invested.

Prior to investing, prospective purchasers should review the prospectus offered by the insurance agent in order to evaluate the management fees associated with the available funds, the investment objectives, risks, and charges.

A Variable Cash Value

Investment returns, the policy's face value, and death benefit are influenced by a host of factors such as fluctuations in the stock exchange and market, changes in the value of currencies, the performance of individual firms, industry trends, and changes in the rate of interest. The variable life insurance policy's cash value is a function of the value of both the invested funds and the monies not invested. If the policy owner's investments perform poorly, the death benefit and cash value are diminished accordingly. Nevertheless, most variable life insurance providers guarantee that the insured's death benefit will not dip below a specified amount. 

Tax Advantages

Variable life insurance policies offer numerous tax benefits:

  1. The death benefit intended for beneficiaries is tax-free.
  2. The policy's accumulated cash value is tax-deferred.
  3. The policy owner can transfer assets from one investment to another without incurring taxation on any gains.


Ability to Borrow Funds

With a variable life insurance policy, a policyholder can borrow accumulated funds during his or her lifetime, and while the policy is in effect, is not required to pay back the funds borrowed. On the other hand, the cash value cannot be withdrawn by the insured without penalty while he or she is alive.

Flexibility of Variable Life Insurance

Purchasers of variable life insurance can reap multiple advantages from the policy's flexible features:

  1. Opportunity to decrease or increase coverage without having to take out another policy
  2. Option to skip premium payments or pay a higher or lower premium
  3. Ability to allocate investment gains towards payment of premiums, thus decreasing the amount to be paid out-of-pocket
  4. Option to utilize the accumulated cash value as collateral for a bank loan


Finding the Right Variable Life Insurer

Prior to purchasing a variable life insurance policy, consumers should read online reviews about the companies being considered as well as verify their policies on individual accounts, track record (i.e. gains and losses) and financial status. Prospective variable insurance policy owners can check a company's ranking through rating services such as Duff & Phelps, Moody's, Standard & Poor's, and AM Best. Another reliable source for experienced and qualified agents is friends and relatives.

Rates and Quotes

Variable life insurance rates and coverage vary from one state to another. It pays to shop since rates can substantially differ from one insurer to the next for identical coverage. Consumers may obtain competitive variable life insurance quotes from a wide array of online insurance quote providers and at no obligation. They need simply enter their age, state and area code, the type of insurance sought, and whether or not they are smokers. Tobacco users can expect to pay slightly higher variable life insurance rates than their non-smoking counterparts.

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