What is variable life insurance?

Life Insurance
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December 2016
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Variable life insurance is the industry's attempt to let you “have your cake and eat it too.” It was a very popular product when I started my career selling life insurance in 1991. At that time, I was a captive agent with one of the original companies to manufacture it. The pitch was then – and still is – that the product allows you to get the best deal for a death benefit as well as the best deal for a living benefit. Maybe.

First, a little history.

From its inception, life insurance has typically been the most cost-effective way to pass money on to your heirs. No other product comes close to getting them the exact amount of money they need, exactly when they need it, for pennies on the dollar. 

Still, the industry wanted to make the product more attractive, so they installed a cash account. This way people could get value from their purchase without waiting until they die. Whole life became popular and offered strong guarantees. Universal life then became popular and offered weaker guarantees, but more flexibility, and the potential for higher gains.

But, these gains would still be determined by the investment performance of an insurance company, so the industry went a step further. They separated the cash account from the policy and let the insured grow cash through market-based investments. Because life insurance can receive favorable tax treatment, these products offered the chance to make money in the market and not pay taxes.

Under the right circumstances, variable life insurance can do exactly that. These are what I consider to be those circumstances:

First and foremost, you have to qualify for a low premium. If the cost of insuring you is too high, then this overhead will significantly suppress your cash growth. Before you even consider purchasing this product, get prequalified for coverage to confirm competitive rates are available, given your own personal risk profile.

Second of all, you really have to know what you're doing as an investor. This product is treated legally as a security, and rightfully so. Like any investment, you have to manage risk and reward, factor in expenses, stay on top of asset allocation, and do everything else needed to insure optimum performance. If you are not prepared to do this yourself, then make sure you have an advisor who will.

Also as part of the management of the product, make sure you understand how to work within existing tax laws. There's a right way, and a wrong way, to grow cash inside life insurance, and take it out. Mistakes can be very costly. If you are considering paying significant sums into your policy, make sure you get professional tax advice.

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