The insurance industry came up with a variation on whole life insurance that allows the consumer to assume the performance risk of the cash value supporting the death benefit amount while guaranteeing at least a minimum death benefit. While this form of insurance has existed in other countries since the 1950s, it did not arrive in the U.S. until the early 1970s.

Structure
Variable life insurance is similar to other types of permanent life insurance, like whole life and universal life. All three offer a build-up of cash value and the opportunity for policy loans. But there are important differences. Whole life offers a fixed premium and a fixed death benefit, while universal life offers both flexible premiums and a flexible death benefit. However, a whole life policy pays a guaranteed (fairly low) rate of return, while universal life policies may adjust the interest rate that is paid on the policy each year. Variable life insurance offers fixed premiums, a flexible death benefit and the ability to earn a variable rate of return.

The difference in these structures can help a potential policyholder choose the right type of policy. For individuals who are most concerned with guarantees, a traditional whole life policy might be best, since premiums, death benefit and rate of return are all guaranteed. Universal life insurance might appeal most to someone seeking flexibility, but who does not want to worry about investment losses. Variable life insurance would be a good match for an individual who is seeking flexible insurance protection and the opportunity for tax-deferred investment growth.

The structure of a variable life insurance policy is similar to the variable annuity contract in several ways:

  • Variable life has a separate account into which the contract holder deposits premiums.
  • The separate account also contains sub-accounts, in which the insured allocates his or her assets into accounts similar to mutual funds according to his or her investment objectives.
  • Therefore, variable life combines the protection and savings functions of traditional life insurance with the growth potential of mutual fund investments.

Premiums
Premiums for variable life insurance are fixed, but a part of them is earmarked for the investment portfolio. In this way, the face amount of the policy and the cash value vary with changes in the sub-account values. The death benefit, however, can never be less than the initial face amount. When the portfolio value increases substantially, the policyholder can use the extra cash in the sub-accounts to purchase additional insurance coverage. Policyholders can also borrow against the accumulated cash value or cash in the policy.

When compared to the same amount of insurance coverage, premiums for variable life are higher than an equivalent whole life policy, as the policyholder is paying for all of the extra features of a variable life policy. Because the separate account is essentially a security, however, a prospectus must be used when selling variable life insurance products.

Earnings
Earnings from a variable life policy are tax-deferred until withdrawn. The earnings are then taxed only to the extent that they exceed the premiums paid into the policy. However, if death benefits are paid out upon the death of the policyholder, the cash value is included in the owner's gross estate and is not taxed as ordinary income. You can review more information on about the taxation of variable life insurance in the Prospects and Customers section.

Policy Loans
Like most forms of permanent life insurance, variable life insurance offers policy loans on a portion of the cash value buildup in the policy. Depending on the issuer, loans may be made for up to 75-90% of the cash value. Because the loan reduces the cash value, it also reduces the death benefit. Taking a policy loan is not a taxable event, because it is not considered a withdrawal. Loans may be paid back with interest.



Introduction

Related Articles
  1. Financial Advisor

    Variable Vs. Variable Universal Life Insurance

    Do you know why you might need one policy versus the other? Read on to find out.
  2. Insurance

    Understanding Taxes on Life Insurance Premiums

    Learn about the tax implications of life insurance premiums, including when they might be taxable and whether they are tax deductible.
  3. Financial Advisor

    Getting Life Insurance in Your 20s Pays Off

    Find out how Americans in their 20s can benefit from a well-thought-out life insurance policy, especially if they are able to build cash value for retirement.
  4. Financial Advisor

    Which Life Insurance is Right For You?

    Consumers have choices when it comes to life insurance. Knowing your future needs for cash or retirement can make the difference in what you select.
  5. Retirement

    Beware the Sneaky Math of Universal Life Insurance

    Universal life insurance's cash value can be a cash cow – if there's any left. Read on to see if it'll work as an income source after you've retired.
  6. Financial Advisor

    Permanent Life Policies: Whole Vs. Universal

    If you're looking for life-long security, choosing between these two is the key.
  7. Personal Finance

    The Best Life Insurance for Military Families

    Two of the most common types of life insurance are term and whole life. Here's why the latter isn't a good idea for most military families.
  8. Insurance

    Life Insurance: putting a Price on Peace of Mind

    Would your death leave loved ones financially stranded? Find out how to ease your mind and keep them protected.
  9. Insurance

    3 Reasons to Avoid Term Insurance

    Find out the reasons why term life insurance may not be for everybody, and why you may want to avoid it in favor of a permanent life insurance policy.
Frequently Asked Questions
  1. What is the difference between yield and return?

    While both terms are often used to describe the performance of an investment, yield and return are not one and the same ...
  2. What are the Differences Among a Real Estate Agent, a broker and a Realtor?

    Learn how agents, realtors, and brokers are often considered the same, but in reality, these real estate positions have different ...
  3. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ...
  4. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ...
Trading Center