What is variable life insurance?
Variable life insurance is a permanent life insurance policy with an investment component. The policy has a cash value account, which is invested in a number of sub-accounts available in the policy. A sub-account acts similar to a mutual fund, except it's only available within a variable life insurance policy. A typical variable life policy will have several sub-accounts to choose from, with some offering upwards of 50 different options.
The cash value account has the potential to grow as the underlying investments in the policy's sub-accounts grow. At the same time, as the underlying investments drop, so may the cash value.
The appeal to variable life insurance lies in the investment element available in the policy and the favorable tax treatment of the policy's cash value growth. Annual growth of the cash value account is not taxable as ordinary income. Furthermore, these values can be accessed in later years and, when done properly through loans using the account as collateral, instead of direct withdrawals, they may be received free of any income taxation.
Similar to mutual funds and other types of investments, a variable life insurance policy must be presented with a prospectus detailing all policy charges, fees and sub-account expenses.
To learn more, read: Variable vs. Variable Universal Life Insurance.
Variable life insurance is a permanent life insurance policy with an investment component. The policy has a cash value account, which is invested in a number of sub-accounts available in the policy. A sub-account acts similar to a mutual fund, except it's only available within a variable life insurance policy.
I’m not a huge fan of this type of Life Insurance. I’ve found people can better serve their protection planning needs with Universal Life policies, with additional benefits for things like Terminal Illness and Chronic Illness riders. With a fully invested portfolio, there is just too much market risk for many people who actually need the underlying life insurance coverage. Bad few years in the market could cause the cash value to drop and put the death benefit in jeopardy when you need it the most.
*The investment return and principal value of variable sub-accounts will fluctuate. Your cash value, and perhaps the death benefit will be determined by the performance of the chosen sub-accounts. Variable universal life insurance policies typically include mortality and expense risk charges, administrative fees, and fund expense charges.
Withdrawals may be taxable and subject to surrender charges. Policy Loans and withdrawal will reduce the policy’s cash value and death benefit. Loans are subject to interest charges.
Hope this helps,
Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA, SIPC, a Registered Investment Advisor. Trilogy Capital Trilogy Financial and NPC are separate and unrelated entities. The opinions voiced in this article are for general information only and do not constitute an endorsement by NPC. NPC does not provide tax advice. www.FinancialPlannerLA.com
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.
Life Insurance categorized as “variable” can come in various different forms. In this discussion, I think it would be best to focus on the more widely known and used policy which is the Variable Universal Life (VUL) Insurance.
This is a type of permanent life insurance that remains in-force so long as premiums are paid, and accumulates cash value. The cash value can then be invested in a wide variety of separate accounts as known as subaccounts which includes stocks, bonds or money market vehicles. Like any type of investment account there are risks involved and with this comes greater volatility, daily fluctuation of cash value and even the possibility of loss of cash value, hence the name “Variable”.
Variable and VUL policies are sold by prospectus. The prospectuses contain more complete information about the policy, including investment objectives, risks, charges, expenses, limitations and restrictions. Please read the prospectuses and consider the information carefully before purchasing a policy or sending money.
Life Insurance and investing can be very complicated, so I highly suggest that you consult with an investment professional to decide whether this is the right type of coverage, and if so, have them assist in selecting the subaccounts for your portfolio as well as conducting ongoing monitoring of its performance.
“Universal” refers to the flexibility the owner has in making premium payments. Not only are they flexible, but they can range from nothing up to the maximums defined by the IRS Code for Life Insurance. A death benefit will be paid at any time as long as the policy is kept in-force. This can occur either through premium payments of if there is sufficient cash value to pay the costs of insurance on the policy, minimum premium payments can be deducted from the cash value. Death benefits have the possibility of being higher on a VUL if the investments made in the separate account outperform the general account of the insurance company when comparing to a standard whole life policy. Rate of return that is variable from separate account performance and flexibility of premium payments are the largest distinctions when comparing a VUL to more traditional whole life products.
Among other features, many insurers offer is a guaranteed minimum death benefit* up to a certain age as long as a given minimum premium is paid. Any growth on cash surrender values while the policy is in force are tax deferred. One can access the cash value as (generally) tax-free loans from your insurance company. Note that, if the loans are outstanding at the time of your death, the company will deduct all outstanding loan balances, plus accumulated interest, from the death benefit paid to your beneficiary.
As you can see, Variable Universal Life Insurance is a mix of Life Insurance and Investing and has many different applications. Its main purpose is forfor financial protection through the deathe benefit, but may also be considered for tax advantaged accumulation, retirement planning, and estate planning strategies. It would be best for you to consult with your tax and financial professional if you have further questions.
Variable Life Insurance: • Is Not a Deposit of Any Bank • Is Not FDIC Insured • Is Not Insured by Any Federal Government Agency • Is Not Guaranteed by Any Bank or Savings Association • May Go Down in Value
Variable life insurance is a permanent form of insurance that builds up cash value but allows you to invest the "extra" in sub-accounts that are managed by many professional management firms. The process of buying a variable policy is to allow your agent or registered representative to run an illustration showing the premiums required to purchase x amount of insurance that will buildup x amount of cash based on the sub-account illustrated performance. It sounds complicated, but it really is not. The key is running a policy that will sustain itself to age 95 to 100 with an interest rate of the sub-accounts that is reasonable, usually 7-8%. The sub-account is the insurance industry equivalent to mutual funds so do not get that confused. The market might average 9-10% for the last 100 years, but it is best to run your sub-account assumed performance a little lower than that for a little more security.
A good, experienced registered representative should take into account if a variable policy makes sense for your insurance/investment portfolio as many times these types of polices can be abused. Consumers can pay into it for a certain period of time and then change their minds mid-stream causing them significant out of pocket expense and then a possible surrender charge on the cash that they did build up. If the consumer does not make the long term commitment to the plan, they likely will lose quite a bit not to mention the time lost. If kept, the policy can be a great tool for insurance protection and cash value options down the road. However, this plan takes many years to complete and insurance needs change over time.
Jason R. Tate, ChFC, CLU, CASL
Thank you for your question! Variable life insurance is a form of permanent life insurance that builds cash value inside mutual fund like sub-accounts. Variable means that the cash value balances can fluctuate based upon the performance of those underlying sub accounts. Since the policy holder chooses the investments for the cash values, they assume the investment risk inherent to the contract. Which means that if they don’t perform as expected or enough premium is invested over time, then the policy could be subject to lapse. Whereas with other forms of "non-variable" permanent life insurance the insurance company retains the investment risk of the underlying cash values. However, changes in premiums paid and interest rates credited to the cash values of these policies can affect the longevity of the policy too. You’ll find links below to a couple articles that will explain more about variable and other forms of life insurance. In addition, I'm sharing a link to a calculator to help you discern an appropriate amount of life insurance for your personal situation. You might have to copy and paste the links to your internet browser.
Variable Life Insurance Article - http://www.davidblountiips.com/Variable-Life-Insurance.c44.htm
What Are the Basic Types of Life Insurance Article - http://www.davidblountiips.com/Types-of-Life-Insurance.c1073.htm?
How Much Life Insurance Do You Need Calculator - http://www.davidblountiips.com/learning_center/calculators/life_insurance
Best wishes and hope these resources were helpful!