Variable life insurance is a type of permanent life insurance policy that provides lifelong coverage as long as premiums are paid. The policy has three primary components:
| Component | Description |
|---|---|
| Death benefit | Left to beneficiaries; a portion of premium goes towards insurance cost and insurer’s fees, while the remainder is invested in cash value that can be used to increase the death benefit, withdrawn as cash, or used as collateral for a loan |
| Cash value | Similar to a brokerage account; can be invested in sub-accounts that resemble mutual funds; management fees charged depending on securities being invested in; has higher upside potential than other cash value policies, but may not have a guaranteed rate of return or may have a cap on the maximum rate of return |
| Fees | Higher administrative fees compared to other life insurance policies due to SEC regulation; fees vary depending on how cash value is invested |
Variable life insurance policies offer around 20 to 30 investment options, including variable sub-accounts and a fixed interest investment option provided by the insurer. However, the cash value investment management fees, listed as “basis points,” can reduce returns by a certain percentage. The death benefit is essentially a “target” based on the assumption of cash value performance and may be reduced if the cash value significantly underperforms.
Variable universal life insurance policies have the cash value structure of variable life insurance, but offer flexible premiums and the option to make a single large payment. Whole life insurance policies offer lower risk and reward than variable life insurance policies and don’t offer flexible premiums. Term life insurance may be a better option if financial obligations are likely to go away within 20 to 30 years, while investing in retirement accounts before investing in variable life insurance is recommended.
It’s important to carefully evaluate expected performance when deciding whether to invest in a brokerage account or variable life insurance policy.
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Article Sources
- Manulife. Variable Life Insurance
- Investopedia. Whole Life Insurance Definition: How It Works, With ...
- Bankrate. Variable Whole Life Insurance (Vwl)
- Cornell Law School. How Variable Life Insurance Works: Pros And Cons
- Dundas Life. Variable Life Insurance: Definition, Tax Benefits, Vs. Term Life