Variable life insurance is a very important category of policies in the insurance market. The biggest advantage for the policy holder is that variable life insurance plans gives the possibility to achieve gains in the cash value. Such gains are tax free to the beneficiary and depending on the case, may be very interesting. Variable life insurance plans offer permanent protection to the beneficiary of the plan in the event of death of the policy holder. As this type of plan allows you to allocate a percentage of your premium cash on a total separate account, this is one of the most expensive types of plan available in the market.
To provide a minimum guaranteed death benefit for a variable life insurance plan, insurance agents are based on “assumed rate of interest”, which is defined as the amount it’s believed an investor could earn in the investment. You may choose a specific investment, such as a money market fund, stocks (this one is particularly popular), bonds or fixed income investments. Both the investment and the cash value may vary, depending of the results of your investment funds. In variable life insurance plans as well as whole life insurance, you pay fixed premiums on a scheduled basis.
Another important aspect of variable life insurance plans is that they allow policy owners to use the investment fund for loans. However, due to the volatility of the separate account, the amount used for loan is limited, usually to only 70% or 80% of the cash value. Variable life insurance plans are also considered as a security, since you are the one who decides where your money would be invested and you take all the risks. That is, the investment risk is switched from the insurance company to the policy owner. As they are considered as security contracts, variable life insurance policies may only be sold with a prospectus (a document presenting important facts about both the policy and the insurance company).
Variable Life is an insurance policy under which the benefit relates to the value of assets that back the contract at the time said benefit is paid.
Permanent life insurance which has the freedom to manage your investment portfolio is known as variable life insurance.
Typically, variable life insurance is the most expensive type of cash value life insurance. This is because unlike whole insurance, variable insurance gives you total control over your investments - what ever kind they may be money market funds, stocks, or bonds.
The amount of times you can alter and update your investment portfolio is commonly unlimited also, but verify this with your insurance broker as some companies may have different rules.
Since many of the benefits of variable life insurance are totally dependent on your ability to invest productively, you should be completely certain that you understand all risks involved before you purchase this type of policy.
The pros and cons of variable insurance
Along with the freedom that is added with variable life insurance there also comes some risk. Since cash value of the policy depends upon the investments you make, the insurance company will not guarantee a minimum amount for this segment of your variable insurance policy.
They are not at all responsible for poor investments you make and, if your investments perform badly, you might be forced to forfeit your savings.
On the other hand, if you invest wisely, your cash value can increase substantially.
There are also considerable tax advantages to variable life insurance policies. The cash value segment is tax-deferred until the policy is redeemed. This means that unlike your own investments, your proceeds are not subjected to capital gains tax even when you change investments - so they grow tax-deferred.
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