Variable Life Insurance: Everything You Need to Know

Life insurance is an essential component of financial planning. It provides financial protection to your family in case of your unexpected death. There are various types of life insurance policies available in the market, and variable life insurance is one of them. In this article, we will discuss what variable life insurance is, how it works, its benefits, and drawbacks.

What is Variable Life Insurance?

Variable life insurance is a type of permanent life insurance that provides both a death benefit and an investment component. It enables policyholders to invest their premiums in a range of investment options such as stocks, bonds, and mutual funds. The investment options are subject to market volatility, which means the cash value of the policy can fluctuate up and down.

Variable life insurance policies are sold by insurance companies and are regulated by state insurance laws. The policies have a death benefit, which is a tax-free payment to the beneficiary of the policy after the policyholder’s death.

How Does Variable Life Insurance Work?

Variable life insurance policies work as follows:

1. The policyholder pays premiums into the policy, which are invested into a range of investment options offered by the insurance company.
2. The policyholder can choose how the premiums are invested, and can switch investments as needed.
3. The cash value of the policy grows over time, depending on the performance of the underlying investments.
4. The policyholder can borrow against the cash value of the policy, although this decreases the death benefit if the loan is not repaid.
5. The death benefit is paid to the beneficiary tax-free after the policyholder’s death.

What are the Benefits of Variable Life Insurance?

Variable life insurance provides several benefits, including:

• Death benefit: Variable life insurance provides a tax-free death benefit to the beneficiary of the policy.
• Investment component: Variable life insurance policies provide an investment component that can help policyholders grow their wealth over time.
• Flexibility: Policyholders can choose from a range of investment options and change their investments as needed.
• Tax benefits: Variable life insurance policies offer tax-deferred growth of the cash value, and the death benefit is paid out tax-free.
• Estate planning: Variable life insurance policies can be used as an estate planning tool to help heirs pay estate taxes.

What are the Drawbacks of Variable Life Insurance?

Variable life insurance also has some drawbacks, which include:

• Cost: Variable life insurance policies are generally more expensive than other types of life insurance, since they have an investment component.
• Risk: The investment component of variable life insurance policies is subject to market volatility, which means the cash value of the policy can fluctuate up and down.
• Complexity: Variable life insurance policies can be complex, and policyholders may need to hire a financial advisor to manage their investments.
• Surrender charges: Policyholders who surrender their policies early may have to pay surrender charges, which can be costly.

FAQs

What is the difference between variable life insurance and whole life insurance?

The main difference between variable life insurance and whole life insurance is that variable life insurance policies have an investment component that is subject to market volatility, while whole life insurance policies have a fixed interest rate on the cash value component.

What is the cash value of a variable life insurance policy?

The cash value of a variable life insurance policy is the amount of money that policyholders can access during their lifetime by borrowing against the policy. The cash value grows over time, depending on the performance of the underlying investments.

Can I borrow from my variable life insurance policy?

Yes, policyholders can usually borrow against the cash value of their variable life insurance policies. However, this decreases the death benefit if the loan is not repaid.

Are variable life insurance policies tax-free?

The death benefit of a variable life insurance policy is paid out tax-free to the beneficiary of the policy. The cash value of the policy grows tax-deferred.

The Bottom Line

Variable life insurance is a type of permanent life insurance that provides both a death benefit and an investment component. It enables policyholders to invest their premiums in a range of investment options, with the cash value of the policy subject to market volatility. Variable life insurance policies have pros and cons, and it is important to research and understand them before purchasing such a policy.