Variable life insurance, also called variable appreciable life insurance, provides lifelong coverage as well as a cash value account. Show
Variable life insurance policies have higher upside potential of earning cash than other permanent life insurance policies. With variable life insurance, you get to decide how to invest the cash value. However, variable life insurance policies often come with higher fees than other cash value life insurance policies.
Find Cheap Life Insurance Quotes in Your Area Get your quote today What is variable life insurance?Variable life insurance is a type of permanent life insurance policy., meaning coverage will remain in place for your lifetime so long as premiums are paid. Every variable life insurance policy has three primary components:
A death benefit is what is left to your beneficiaries. Every time you make a premium payment, a portion of it goes towards the cost of insurance and insurer’s fees, which keep the death benefit in place. The remainder of the premium goes towards the policy’s cash value, which is similar in structure to a brokerage account. The cash value can be invested in certain securities (often called sub-accounts) which resemble mutual funds. If the cash value performs well, it can be used to increase the death benefit, withdrawn as cash or used as collateral for a loan. The cash value is also the amount of money you would receive if you decided to give up your coverage to the insurer, or surrender it. Cash Value of Variable Life InsuranceA variable life insurance policy’s cash policy works is unique from a whole or indexed universal life insurance policy. Each variable life policy comes with a prospectus detailing around 20 to 30 options for investing the cash value, and the cash value investment options are similar to mutual funds in that there’s a particular set of securities that the money would be invested in, such as:
Variable life insurance policies also generally offer a fixed interest investment option provided by the insurer. However, whatever option you choose, you will be charged management fees, similar to expense ratios for mutual funds. These fees vary according to the securities being invested in and can be quite high if the money is being actively invested (meaning a portfolio manager is picking stocks). InvestmentsCash value investment management fees are sometimes listed as "basis points" and one basis point equals 0.01%. This means that if an investment option is listed as having a 6% historical rate of return but comes with 125 basis points in management fees, you should keep in mind that returns will be reduced by 1.25%. Since you’re able to choose from a variety of investment options, variable life insurance policies have higher upside potential than other cash value policies, such as whole life insurance. However, variable life insurance policies may not have a guaranteed rate of return, or it may be quite low. In addition, your cash value investment options typically have a cap on the maximum rate of return. Your cash value can actually decrease in value during bad years and may not perform as well as it could during good years. A key downside to variable life insuranceEvery permanent life insurance policy comes with fees but the downside to variable life insurance is that it tends to have the highest. Variable life insurance policies will typically have the following costs:
Other costs and risksThe administrative fees for a variable life insurance policy will be higher than other life insurance policies in part because these policies are SEC regulated investments. You should take into consideration that the insurer will pass these charges onto you as you determine how to invest the policy’s cash value. For example, if you choose relatively conservative investments, you’re likely to have gains that are more similar to a whole life insurance policy’s cash value. However, if you purchased whole life insurance you pay lower fees. Therefore, with the same cash value rate of return, you would actually perform worse with a variable life insurance policy. Variable life insurance death benefitThe death benefit of a variable life insurance policy is typically structured in one of two ways:
Some variable life insurance policies provide other death benefit structures, such as equaling the policy’s face value plus all premiums paid, but these two are the most common. No matter your death benefit structure, you should always check the policy’s actual terms. And you should confirm whether the death benefit is guaranteed and, if so, if the guaranteed value is the same as what is projected. The death benefit is essentially a "target" using an assumption of cash value performance, such as a 4% annual rate of return. The insurer projects that, assuming it meets this rate of return, the cash value would equal the policy’s face value when you pass away. However, if your cash value significantly underperforms, it may reduce your actual death benefit, depending on your policy’s terms. Flexible premiums with variable universal life insuranceVariable universal life insurance policies have the cash value structure of variable life insurance, but you can use the cash value to pay premiums. You can also pay a larger amount in premiums if you choose to do so. Therefore, these policies are sometimes referred to as flexible premium variable life insurance. While variable universal life insurance policies typically have minimum and maximum premiums, you’re free to pay whatever amount you choose that falls within these limits. This means you can:
There are also single premium variable universal life insurance policies which allow you to purchase coverage and fund the policy’s cash value with a single payment. You essentially purchase coverage and make all your required cash value contributions at once. But you also have the option of contributing more to the policy’s cash value if you choose to do so. How variable life insurance compares to other productsIf you’re considering variable life insurance, it’s important to consider how this policy stacks up to similar financial products. A variable annuity is just a tax-deferred annuity in which you get to choose how the value of the annuity is invested. It’s somewhat similar to a variable life insurance policy in that:
Variable annuity vs. variable life insuranceThe primary difference between a variable annuity and variable life insurance is that with the former you will receive your investment back in a series of payments from the insurer. With the latter, you can make a series of withdrawals from the policy’s cash value, make a single large withdrawal or simply use the cash value as collateral in a policy loan. Variable annuities are also restricted in that you may have to pay a fee in order to make withdrawals before a certain age. Withdrawals from variable life insurance policies are only restricted by the amount of cash value available. Variable life insurance vs. whole life insuranceBoth variable and whole life insurance. offer lifelong coverage, but whole life insurance policies offer both lower risk and reward. Whole life insurance policies have:
The cash value of variable life insurance policies can grow at a much faster rate and in certain cases can be used to pay premiums. Whole life insurance policies don’t offer the flexible premiums of variable universal life insurance policies. Variable life insurance vs. mutual funds and term life insurance"Buy term and invest the difference" is a phrase often used to discourage people from buying cash value life insurance policies, such as variable life insurance. If your financial obligations are likely to go away within 20 to 30 years, then purchasing term life insurance is likely to be a better option as it’s significantly less expensive than variable life insurance. For example, if you are purchasing life insurance to make sure your family could stay in your home if you pass away, and you have a 15-year mortgage, you would do better with term life insurance. Similarly, if you could save enough money over the next couple of decades to handle any future financial obligations, you should do so and just buy term coverage as a backup. With variable life insurance, you’re paying more to have a death benefit in place for the length of your life. Otherwise, you could simply purchase guaranteed universal life insurance and invest the difference in mutual funds or ETFs. Continue adding to your retirement fundThere are pros and cons to both options but we would typically recommend maxing out contributions to retirement accounts prior to investing in variable life insurance. With a 401(k) or IRA, your money will grow tax-deferred and you’ll have a wider variety of investment options with lower fees. The only downside is that it will be harder to access your money for a period of time, but even variable life insurance policies have surrender and withdrawal fees. Assuming your retirement accounts are fully funded, then whether to put your money in a brokerage account or variable life insurance policy is dependent on how you believe the investment options of the variable policy will perform. Tax-deferred growth can counteract moderate management fees if your cash value performs well enough, but you need to evaluate expected performance for yourself. |