Key Takeaways
- Permanent life insurance with investment component.
- Cash value grows tax-deferred based on market performance.
- Death benefit includes guaranteed minimum plus investment gains.
- Premiums fund death benefit, fees, and cash value investments.
What is Variable Life Insurance?
Variable life insurance is a type of permanent life insurance that combines death benefit protection with an investment component. Your premiums fund both the insurance coverage and a cash value account invested in subaccounts similar to mutual funds, allowing potential growth based on market performance. This product differs from term life insurance by building a tax-deferred cash value while providing lifelong coverage.
The death benefit typically includes a guaranteed minimum amount, often referred to as face value, with a variable portion linked to investment results.
Key Characteristics
Variable life insurance offers unique features blending insurance and investing:
- Premium Allocation: Fixed premiums are divided between the death benefit, insurer costs, and the cash value invested in various subaccounts.
- Cash Value Growth: Accumulates tax-deferred and fluctuates with market performance, which can increase or decrease your policy’s value.
- Death Benefit Options: You may choose from level death benefits or amounts that include accumulated cash value, with a guaranteed minimum floor.
- Regulation: Classified as a security, it is subject to federal securities laws due to investment risks involved.
- Riders and Add-Ons: Many policies offer options like accelerated death benefits or long-term care coverage to enhance protection.
How It Works
When you pay premiums, a portion covers the insurance protection while the remainder is invested in subaccounts similar to mutual funds, allowing you to select from options aligned with your risk tolerance. The cash value grows tax-deferred, meaning you do not pay taxes on gains while funds remain in the policy.
Your death benefit guarantees a minimum payout, typically the face value, but can increase if investments perform well. Conversely, poor market results may reduce the cash value and variable portion of the death benefit, but not below the guaranteed minimum. This dual nature requires monitoring both insurance and investment components.
Examples and Use Cases
Variable life insurance suits individuals seeking lifelong protection with an investment element and tax advantages. Examples include:
- Wealth accumulation: Investors looking to build cash value while maintaining a death benefit.
- Estate planning: Using the tax-deferred growth and tax-free death benefit to transfer wealth efficiently.
- Corporate executives: Those affiliated with companies like Delta may use variable life policies as part of a comprehensive compensation and benefits package.
- Market-savvy policyholders: Who prefer selecting investment subaccounts similar to options found in low-cost index funds to customize growth potential.
Important Considerations
Before purchasing, evaluate your risk tolerance since the cash value is subject to market volatility, which can impact both growth and death benefits. Unlike fixed life insurance, premiums can be higher due to investment costs and fees.
Loans or withdrawals against your cash value may be tax-advantaged but could reduce the death benefit or cause taxable events if the policy lapses. Understanding terms like paid-up additional insurance can help you make informed decisions about policy adjustments. For a balanced approach, consider diversifying your portfolio with resources like best bond ETFs alongside your policy investments.
Final Words
Variable life insurance combines lifelong coverage with investment opportunities, but market fluctuations can impact your cash value and death benefit. Review your risk tolerance and compare policy options carefully before committing.
Frequently Asked Questions
Variable life insurance is a type of permanent life insurance that combines a death benefit with a cash value component invested in subaccounts similar to mutual funds. The cash value grows based on market performance, and the policy provides lifelong coverage as long as premiums are paid.
The cash value grows tax-deferred based on the performance of investments chosen from a menu of subaccounts. Strong market returns increase the cash value, while poor performance can decrease it, potentially affecting the death benefit unless a minimum guarantee is in place.
Variable life insurance policies typically include a guaranteed minimum death benefit, ensuring beneficiaries receive at least the face value even if investments perform poorly. However, the total death benefit can increase if the cash value grows with favorable market returns.
Yes, many variable life insurance policies offer riders such as accelerated death benefits for terminal illness, long-term care coverage, accidental death benefits, and additional term insurance to tailor the policy to your needs.
The cash value grows tax-deferred, meaning you don’t pay taxes on investment gains while the money remains in the policy. Additionally, death benefits are generally income-tax-free to beneficiaries, and loans or withdrawals up to the amount of premiums paid are usually tax-free.
Unlike term life insurance, which provides coverage for a set period without cash value, variable life insurance offers lifelong coverage with a cash value component invested in the market. Term life is typically less expensive but does not build cash value or offer investment options.
Most variable life policies require fixed premiums, but some allow flexibility by using cash value to cover premiums or paying minimum amounts to keep the policy active. It's important to understand your specific policy's premium requirements.
Since the cash value is invested in market-based subaccounts, it carries investment risk, meaning poor market performance can reduce your cash value and potentially affect your death benefit. Additionally, fees and expenses can impact the policy's growth and overall value.
