The concept of life insurance has been around for decades and decades. It’s one of the best safety nets that you can buy for your family. It will ensure that they have the protection that they need, regardless of what happens to you.
Over time, life insurance policies have evolved from simply offering pure death benefit protection, to providing many additional savings and investment options. One type of policy that allows the policyholder the ability to take part in the potential growth of the equity market is variable life insurance. There are certain advantages and drawbacks of variable life insurance that you may want to consider before purchasing this type of coverage.
Let’s look at the ins and outs of variable life insurance and solve some of the mysteries surrounding variable life insurance. Unlike some of the other kinds of life insurance, these plans aren’t exactly the easiest to understand.
Definition Of Variable Life Insurance
Variable life is whole life insurance. This type of policy has permanent death benefit proceeds whereby funds will be available to a beneficiary (or beneficiaries) for final expenses and other needs of the insured’s survivors. The other component that is found in variable life insurance is used for investing. For more on the definition of variable life insurance, look here.
The Inner Workings Of Variable Life Insurance
Variable life insurance policies are permanent life insurance plans. This is because these plans offer a guaranteed death benefit component. However, they also allow their owners to invest in a variety of “separate” accounts where some different investments may be chosen for inclusion in the policy’s cash component. This article covers detailed information on different components of life insurance.
The investment area of a variable life insurance policy allows the policy owner to take part in a variety of different investment options. This can essentially enable this portion of the policy the potential to grow quite a bit – depending on the performance of the underlying investments that are chosen. Just some of the investment vehicles that a variable life insurance policyholder can choose from include stocks, bonds, mutual funds, and money market funds.
Variable life insurance policies got their name because when premiums are paid into the plan, the portion of the premium that is allocated to the investment portion of the policy will “vary,” as it is subject to the up and down fluctuations of the underlying equity market. Because many of the investments within a variable life insurance policy are equities, these plans are considered to be securities. Therefore, they are regulated by federal securities laws.
It is important to note that investment markets can both rise and fall. With this in mind, it is possible that the value of a variable life insurance policy’s investment component could fall if the underlying investments perform poorly.
Why Consider Purchasing A Variable Life Insurance Policy?
Although variable life insurance may not suit everyone, there are certain situations in which this type of life insurance could be a perfect fit. Some of the advantages of variable life insurance can include:
- Fixed Premiums – One big advantage to owning a variable life insurance policy is that the premium amount is usually fixed. Therefore, in most cases, the policyholder will not need to worry about rising premiums in the future.
- Guaranteed Death Benefit – Even though fluctuations in the market can affect the value of the policy’s investment component, the death benefit amount that goes to the policy’s beneficiaries is guaranteed. No matter what happens in the underlying market, funds will be available from this portion of the policy if needed.
- Tax Deferral – The funds in the underlying investment account are tax-deferred. This can help these funds to accumulate faster. For Tax related benefits of owning a life insurance policy, read this article.
- Investment Variety – Due to the wide variety of investment options that are available, variable life insurance can offer a policyholder much more choice in potential growth options for their invested funds. This differs from other types of permanent insurance such as whole life where the insurance company chooses the underlying investment allocations, as well as the interest rate that is offered to the policyholder.
- Ability to Borrow – In many cases, the funds that are in the investment component of a variable life insurance policy can be borrowed by the policyholder at little or no interest. Also, frequently the cash value can also be used for paying future policy premiums that are due. This can alleviate the policyholder from having to pay premiums out-of-pocket if they so choose.
Disadvantages of a Variable Life Insurance Policy
One problem with these variable plans is the cost. They are nowhere near the most affordable option out there. With all of the additional benefits you get with these plans, you’re going to pay some higher rates. If you want cheap life insurance, this won’t be your best choice.
Another disadvantage of these plans is there is no guaranteed growth. With a whole life insurance policy, you don’t have to worry about the growth of the cash value. With variable life insurance, you have no idea how much you’re going to earn. Sure, this is true with any investment, but if you want some trusted growth without all of the management of a variable life insurance plan, there are some simpler options out there.
What To Consider When Purchasing Variable Life Insurance
Those who own a variable life insurance policy will typically be required to take a more active role in the investment portion of the policy. Therefore, it is a good idea to understand how investing in stocks, mutual funds, and other investment vehicles works before moving forward with the policy purchase. Given this, the owner of a variable life insurance policy should generally have a higher risk tolerance, as it is possible that the value of the invested funds could fluctuate up and down regularly.
Due to the flexibility of variable life, however, this type of policy can allow policyholders to obtain a much higher rate of return on invested funds, while at the same time getting a guaranteed amount of coverage.
One factor you should consider when you’re thinking about buying a variable life insurance policy is the goal of your protection. If you just want simple life insurance to protect your family and nothing more, then these are the best route. A term insurance policy is going to be the most straightforward kind of life insurance.
Term or Variable Life Insurance
If you decide that variable life insurance policies aren’t the best option for you, there are plenty of other plans that you can choose from. If you want the cheapest option, go term.
They won’t give you permanent coverage like a variable option and there is no cash value, but you get the most bang for your buck. You need to decide what’s important to you.
Getting Cheap Variable Life Insurance
As we mentioned, one of the main complaints against variable life insurance coverage is the price. They are not the cheapest, but they don’t have to strain your bank account.
Your health determines your rates. The exam will impact your premium unless you have chosen to purchase a no medical exam required policy, which will result in higher premium rates.
If you want to get lower rates for your policy, you’ll need to improve your health. Start an exercise program. Getting regular exercise can work wonders on your health.
Every life insurance company has a different algorithm for how they calculate rates. Some companies emphasize certain areas more than others. If you were to get quotes for the same plan from three different companies, those rates would be all across the spectrum. It’s easy to see why you should get several quotes before you pick a plan.
Not only can we connect you with the best rates for your insurance needs, but we can also answer any questions you have and help you decide which one is going to be best for your loved ones. We have years of experience and we can ask you a couple of questions which can determine the kind of coverage you will need.
Life Insurance, Why it Matters
You want to protect your family, and life insurance is the perfect way to do that. Life insurance can help your family in case of a tragedy. If you’re the mainstream of income, your family would be sunk without your monthly paycheck.
Don’t leave your family unprotected any longer. Go ahead and give us a call. We can help you compare all of the variable policies and show you which one is best.