A Variable Insurance Policy

What is a variable insurance policy?

A variable insurance policy is a type of life insurance policy that allows you to invest in a variety of investments such as stocks, bonds, and money market funds. The death benefit is still the primary focus of the policy, but the policyholder has the ability to allocate the cash value of the policy to the investment options.

How does a variable insurance policy work?

When you purchase a variable insurance policy, you are essentially buying two things: a life insurance policy and an investment account. The premiums you pay into the policy are split between the two. The life insurance portion of the policy provides a death benefit to the beneficiaries named in the policy. The investment account portion of the policy allows the policyholder to select from a variety of investment options.

The cash value of the policy fluctuates based on the performance of the investment options. If the investments perform well, the cash value increases. If they do not perform well, the cash value decreases. The policyholder has the ability to adjust the investment allocation as needed.

Types of Variable Insurance Policies

Variable universal life insurance (VUL)

A variable universal life insurance policy (VUL) is a type of permanent life insurance that allows policyholders to invest money in various accounts. VUL policies offer the greatest flexibility and can be customized to meet the needs of the policyholder.

The policyholder can adjust the death benefit, investment allocation, and premium payments as needed. The policyholder can also take loans or withdrawals from the cash value of the policy.

Variable life insurance (VL)

A variable life insurance policy (VL) is a type of permanent life insurance that allows policyholders to invest money in sub-accounts. The policyholder has less flexibility with VL policies than with VUL policies.

The death benefit, premium payments, and investment options are generally fixed. The policyholder cannot take loans or withdrawals from the cash value of the policy.

Features and Benefits of Variable Insurance Policies

Flexibility

Variable insurance policies offer a high level of flexibility. Policyholders can adjust the death benefit, premium payments, and investment allocation as needed. This is particularly beneficial for those who experience changes in their financial or personal circumstances.

Potential for High Returns

One of the key benefits of a variable insurance policy is the potential for high returns on the investment portion of the policy. The policyholder has the ability to invest in a variety of options, including stocks and bonds, which have the potential for higher returns than traditional savings accounts or fixed annuities.

A Tax-Advantaged Investment Option

Variable insurance policies offer tax advantages that other types of investments do not. The earnings on the investment portion of the policy are tax-deferred until they are withdrawn. This means that the policyholder can avoid paying taxes on the investment earnings until they actually take distributions from the policy.

Cash Value

Variable insurance policies also offer cash value accumulation. The cash value of the policy increases over time based on the performance of the investment options. The policyholder can also take loans or withdrawals from the cash value of the policy.

Drawbacks of Variable Insurance Policies

Expense

Variable insurance policies tend to be more expensive than other types of life insurance policies. The premiums are split between the life insurance portion of the policy and the investment portion of the policy. This means that policyholders pay higher fees and expenses for the investment portion of the policy.

Complexity

Variable insurance policies can be complex and difficult to understand. The policyholder must have a good understanding of the investment options and how they work. This can be a challenge for those who are not familiar with investing.

Risk

Variable insurance policies are subject to market risk. If the investment options do not perform well, the cash value of the policy can decrease. This can be a significant risk for those who are relying on the policy for retirement income or other financial needs.

FAQ

What happens if the investment options do not perform well?

If the investment options do not perform well, the cash value of the policy can decrease. This can impact the death benefit and the value of the policy. The policyholder may need to adjust the investment allocation or consider investing in different options.

Can I borrow money from my variable insurance policy?

Yes, you can borrow money from the cash value of your variable insurance policy. However, you will need to pay interest on the loan and you may also need to pay fees.

What happens if I stop paying my premiums?

If you stop paying your premiums, your variable insurance policy may lapse. This means that you will no longer have life insurance coverage and you may lose the cash value of the policy. You may be able to reinstate the policy by paying the premiums that are due.

How do I choose the investment options for my variable insurance policy?

Choosing the investment options for your variable insurance policy can be a complex process. It is important to work with a financial professional who can help you understand the options and make informed decisions. You should also consider your risk tolerance, investment goals, and overall financial situation.

What are the tax implications of a variable insurance policy?

The earnings on the investment portion of a variable insurance policy are tax-deferred until they are withdrawn. This means that you can avoid paying taxes on the investment earnings until you actually take distributions from the policy. However, if you take withdrawals or loans from the policy, you may be subject to taxes and penalties.

Conclusion

Variable insurance policies offer a high level of flexibility and the potential for high returns on investment. They also offer tax advantages and cash value accumulation. However, they can be expensive, complex, and subject to market risk. It is important to work with a financial professional who can help you understand the options and make informed decisions about your policy.

Comparison of Variable Insurance Policies

	Variable Universal Life (VUL)	Variable Life (VL)
Flexibility	High	Low
Potential for High Returns	High	High
Expense	High	Medium
Complexity	High	Medium
Risk	High	High