Key Takeaways
- Death benefit varies with investment performance.
- Includes a guaranteed minimum payout.
- Offers potential for higher beneficiary payout.
- Exposes beneficiaries to market risk.
What is Variable Death Benefit?
A variable death benefit is the payout amount to beneficiaries that fluctuates based on the investment performance of the insurance policy's separate account or subaccounts. Unlike a fixed death benefit, this amount can increase or decrease depending on how well your chosen investments perform within the policy.
This concept ties closely to the policy's face value, but the final benefit may exceed or fall below it based on market results, making it a dynamic component of variable life insurance.
Key Characteristics
Variable death benefits combine insurance protection with investment performance, offering flexibility but also risk:
- Investment-Linked: The death benefit depends on the cash value invested in subaccounts, similar to mutual funds like SCHB.
- Minimum Guaranteed Amount: Policies often guarantee a base death benefit regardless of investment losses.
- Cash Value Growth: Cash values grow tax-deferred and can be borrowed against or used to pay premiums.
- Market Risk Exposure: Poor investment results can reduce the death benefit.
- Policy Costs: Higher fees than term insurance reflect the investment management and guarantees involved.
How It Works
When you purchase a variable life insurance policy, you select a fixed face value and allocate premiums into investment options, often through separate accounts. The death benefit may be structured as the face amount plus the current cash value, which fluctuates with market performance.
If your investments perform well, the cash value increases, boosting the total death benefit beyond the original amount. Conversely, if markets decline, the cash value drops, potentially lowering the death benefit but never below a guaranteed minimum. This mechanism allows you to balance risk and reward within your policy.
Examples and Use Cases
Variable death benefits suit individuals seeking both life insurance protection and investment growth potential:
- Long-Term Investors: Those comfortable with market fluctuations may choose funds like IVV to potentially increase death benefits over time.
- Conservative Allocators: Allocating to bond funds such as BND can reduce volatility while maintaining some growth opportunity.
- Insurance Buyers: Companies such as SCHB offer investment options within variable policies that allow for diversification and risk management.
- Policyholders Seeking Flexibility: Leveraging paid-up additional insurance provisions can increase coverage without new underwriting.
Important Considerations
Before choosing a variable death benefit, understand that market risk directly impacts your beneficiaries’ payout and higher fees apply compared to fixed policies. Monitoring investment performance regularly is essential to align with your financial goals.
Additionally, the financial strength of your insurance provider influences guarantees, so consider companies with strong ratings. Borrowing against cash value affects both the death benefit and policy duration, so use loans cautiously to avoid lapses.
Final Words
A variable death benefit offers growth potential tied to your investment choices but comes with fluctuating risk. Review your policy’s guarantees and investment options regularly to ensure it aligns with your financial goals.
Frequently Asked Questions
A variable death benefit is the amount paid to beneficiaries that can fluctuate based on the investment performance of the policy's separate account or subaccounts. Unlike a fixed death benefit, it can increase or decrease depending on how well the underlying investments perform.
The death benefit typically includes a fixed face amount plus a variable cash value tied to investments. If the investments perform well, the death benefit increases; if they perform poorly, it may decrease, though most policies guarantee a minimum death benefit.
Variable death benefits offer growth potential if investments do well, give you control over how your cash value is invested, and provide tax-deferred growth. Additionally, you can access living benefits like loans or withdrawals from the accumulated cash value.
Yes, since the death benefit depends on market performance, poor investment results can reduce the amount your beneficiaries receive. Also, variable life insurance policies tend to have higher costs and require more active management compared to fixed policies.
Most variable life insurance policies include a guaranteed minimum death benefit, ensuring beneficiaries receive at least a baseline amount even if investment performance is poor, though this minimum may be less than the potential maximum death benefit.
Yes, you have the flexibility to allocate your cash value among various investment options, such as mutual funds or subaccounts, allowing you to tailor your investment strategy according to your risk tolerance and goals.
The cash value grows based on the performance of the investments you select within the policy's separate account. This growth is tax-deferred, meaning you won't pay taxes on gains until you withdraw funds or the policy pays out.
The death benefit guarantees are backed by the financial strength of the insurance company, so if the company encounters financial problems, it could impact the guarantees and benefits offered under the policy.
