If you’re looking for a life insurance policy that can help you maximize your investment returns, then you may want to consider variable life insurance. This type of policy offers coverage to your beneficiaries upon your death while giving you the opportunity to invest in a range of underlying investment options, such as mutual funds. Here, we’ll take a closer look at what variable life insurance is, how it works, and whether it could be the right choice for you.
What Is Variable Life Insurance?
Variable life insurance is a type of permanent life insurance that combines a death benefit with an investment account. The policyholder pays a premium to the insurer, which is used to pay for the death benefit coverage and invest in a range of underlying investment options that the policyholder can choose from. The investment account is held within the policy and is typically tax-deferred, meaning that the policyholder doesn’t have to pay taxes on investment gains until they withdraw the funds.
Variable life insurance policies offer policyholders the potential for higher investment returns compared to other types of life insurance policies, such as whole life insurance. However, the policyholder also assumes more investment risk, as the value of the investment account can go up or down depending on market conditions.
The Benefits of Variable Life Insurance
Variable life insurance policies offer several benefits, including:
Benefits |
Description |
|---|---|
Potential for High Investment Returns |
Policyholders have the opportunity to invest in a range of underlying investment options, such as mutual funds, which can potentially provide higher investment returns over the long term compared to other types of life insurance policies. |
Tax Benefits |
The investment account within the policy is typically tax-deferred, meaning that policyholders don’t have to pay taxes on investment gains until they withdraw the funds. This can help to maximize investment returns over time. |
Death Benefit Coverage |
Variable life insurance policies provide a death benefit to beneficiaries upon the policyholder’s death, which can help to provide financial support to loved ones. |
Flexibility |
Policyholders have the flexibility to adjust their premiums and investment options over time, which can help to meet changing financial needs. |
The Drawbacks of Variable Life Insurance
While variable life insurance policies offer several benefits, they also come with some drawbacks, including:
Drawbacks |
Description |
|---|---|
Investment Risk |
Variable life insurance policies come with more investment risk compared to other types of life insurance policies, as the value of the investment account can go up or down depending on market conditions. This means that policyholders may not receive the expected returns on their investment. |
Policy Fees |
Variable life insurance policies are typically more expensive than other types of life insurance policies, as they come with additional fees for managing the investment account. These fees can eat into investment returns over time. |
Complexity |
Variable life insurance policies can be more complex than other types of life insurance policies, as policyholders need to choose from a range of underlying investment options and monitor their investments over time. |
How Does Variable Life Insurance Work?
Variable life insurance policies work by combining a death benefit with an investment account. Here’s how it works:
Step 1: Choose Your Death Benefit
The first step in getting a variable life insurance policy is to choose your death benefit. This is the amount of coverage that will be paid out to your beneficiaries upon your death. The death benefit can typically be selected in increments, such as $50,000 or $100,000.
Step 2: Choose Your Investment Options
The next step is to choose your investment options. Variable life insurance policies typically offer a range of investment options, such as mutual funds or exchange-traded funds (ETFs). The policyholder can choose to allocate their premium payments among these investment options based on their risk tolerance and investment goals.
Step 3: Pay Your Premiums
Once you’ve chosen your death benefit and investment options, the next step is to pay your premiums. The premium is the amount of money that you pay to the insurer to keep your policy in force. The premium is typically paid on a monthly or annual basis.
Step 4: Monitor Your Investments
As your policy is in force, you’ll want to monitor your investments to ensure that they’re meeting your investment goals. The value of the investment account can go up or down depending on market conditions, so it’s important to regularly review your investment options and adjust your allocation if needed.
Step 5: Receive Your Death Benefit
If you pass away while your policy is in force, your beneficiaries will receive the death benefit coverage that you chose when you first purchased the policy. The death benefit can typically be paid out in a lump sum or in installments.
FAQ: Frequently Asked Questions About Variable Life Insurance
Q: Is variable life insurance a good investment?
A: Variable life insurance can be a good investment for those who are looking for a life insurance policy that can offer higher investment returns compared to other types of life insurance policies. However, it’s important to remember that variable life insurance policies come with more investment risk and can be more complex than other types of life insurance policies.
Q: How much does variable life insurance cost?
A: The cost of variable life insurance can vary depending on a range of factors, such as the amount of coverage selected, the age and health of the policyholder, and the investment options chosen. Variable life insurance policies are typically more expensive than other types of life insurance policies due to the additional fees for managing the investment account.
Q: Can I change my investment options in a variable life insurance policy?
A: Yes, policyholders have the flexibility to adjust their investment options over time to meet changing financial needs. However, there may be fees associated with changing investment options, so it’s important to carefully review the policy terms before making any changes.
Q: Is the investment account within a variable life insurance policy tax-deferred?
A: Yes, the investment account within a variable life insurance policy is typically tax-deferred, meaning that policyholders don’t have to pay taxes on investment gains until they withdraw the funds.
Q: What happens to the investment account if I cancel my variable life insurance policy?
A: If you cancel your variable life insurance policy, you may be able to receive the cash value of the investment account, minus any surrender charges or fees. However, you may also be subject to taxes on any investment gains that you have accrued.
Q: Can I borrow against the investment account in a variable life insurance policy?
A: Yes, some variable life insurance policies allow policyholders to borrow against the cash value of the investment account. However, borrowing against the investment account can reduce the value of the policy over time and may incur additional fees or interest charges.
The Bottom Line
Variable life insurance can be a good option for those who are looking for a life insurance policy that can offer higher investment returns compared to other types of life insurance policies. However, variable life insurance policies come with more investment risk and can be more complex than other types of life insurance policies, so it’s important to carefully review the policy terms before making a purchase.