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In the family of life insurance products, the well known siblings are term life insurance, whole life insurance, and universal life insurance. But the strange half-brother in this family is variable life insurance. We refer to it as a half-brother because it resembles other life insurance products in some ways while looking remarkably different in others.
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Variable life insurance is considered a cash value insurance product similar to universal life coverage. The term “cash value” implies that the policy will always maintain a certain level of benefits. Cash value is what the beneficiary will receive upon the death of the insured.
The reason why variable life insurance is called “variable” is because of the underlying investment component within all variable life insurance policies. Investing involves uncertainty and risk (i.e. variable returns).
Variable Life Insurance is an Investment Vehicle
The primary component of variable life insurance which makes it so attractive is the ability of the policy holder to invest in any number instruments within the insurance company’s portfolio. For instance, if the portfolio offers a mixture of stocks, bonds, mutual funds, etc., the money contributed to the insurance policy could be invested across the entire spectrum. Such investments give the policy holder great latitude in maximizing earnings.
There are two downsides to variable life insurance:
First of all, a variable life insurance policy is sold as an investment rather than a traditional insurance product. It must be presented to the investor with a prospectus. Therefore, it is the responsibility of the investor to thoroughly research the options available and the historical performance of the policy he is considering. At the end of the day, whether his policy gains or loses will be entirely up to him.
The second downside is the fact that with variable life insurance, like any investment tool, the risk of financial loss is always present. In theory, the investor could lose everything he puts into the policy if his investments fail.
Making matters worse, a cash value policy puts the onus of maintaining said value on the policyholder, not the insurance company. If the cash value does not stay on schedule the policyholder is expected to make additional payments to keep it at the agreed upon level.
The Relationship Between Cash Value and Death Benefits
With the variable life insurance policy, there will almost always be a minimum death benefit paid. However, the minimum benefit is generally not enough to cover expenses and replace lost income indefinitely. This is by design. The insurance company does not want the investor to settle for the minimum benefit. Rather, they want the investor to continue building cash value, which in turn, gives them more money to invest as well.
In the case of declining cash value, the policy holder’s investments may fail to the extent that he does not have enough time to rebuild. This will affect the death benefit should he pass on while cash value is still low. The added risk makes variable life insurance a poor option for people in the later stages of investing.
The Advantages of Variable Life Insurance
For younger investors just getting started, a variable life insurance policy represents the possibility of earning a large death benefit for the future. You may be a member of the upper middle class, enjoying a certain level of lifestyle. Ensuring your spouse can maintain such a level of lifestyle requires an adequate death benefit upon your passing. Variable life insurance offers a chance to make such a death benefit possible.
A wise investor knows how to take advantage of markets when they are in an upward trend. Likewise, he or she knows to pull back when markets are trending downward. The holder of a variable life insurance policy who is also a wise investor can turn this insurance into a rather serious cash amount over the course of 20 to 30 years.
Some Final Words About Variable Life Insurance
Even though variable life insurance is a cash value product, investors are locked into the policy for the agreed life of the contract. This means they cannot withdraw against the cash value at any time. This is different from universal life, which offers the possibility of taking a loan or withdrawal against the policy in case of financial need.
The variable life insurance policy also has no endowment age. With other types of permanent life insurance the death benefit is not payable until a specified amount of time has passed. With variable life insurance, benefits can be paid any time as long as the cash value is high enough to cover the cost of the policy.
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