What is Variable Life Insurance
Posted in General Life Insurance Information last updated on January 6, 2022There is no denying that life insurance is hard for some people to understand especially when you through variable life insurance into the equation.
There is no denying that life insurance is hard for some people to understand especially when you through variable life insurance into the equation.
Figuring out the right amount of coverage, type of policy, and how to get the best price for your health can be confusing.
Add in mutual funds and investments, and it gets even more confusing.
Did you know that there is a hybrid life insurance policy that offers a death benefit to your beneficiary as well as an investment account?
If you haven’t heard of this before, you’ve come to the right place.
Today, we’re going to focus on variable life insurance. What it means, how it works, and why it’s different from other life insurance policies.
And of course, help you make a decision if it’s the right product for you.
What is Variable Life Insurance?
Put simply, variable life insurance is whole life insurance with some extras.
If you remember from our article What is Whole Life Insurance?, it’s a permanent life insurance policy that also has cash value included.
When comparing variable life insurance vs whole life insurance, variable offers:
- A guaranteed death benefit to your beneficiary (as long as the policy doesn’t lapse)
- Cash value (dependent on the premium amount invested and investment performance)
- Ability to change investment funds and the amount allocated
- Ability to purchase more life insurance using the cash value
- Flexible premium
Whereas whole life insurance offers:
- A guaranteed death benefit to your beneficiary (as long as the policy doesn’t lapse)
- Cash value (dictated by a guaranteed maximum amount tied to the stock market but you have no control how it is invested)
- A minimum amount guaranteed as cash value
- Fixed premium
Within your variable life insurance policy, you have the option to invest in various vehicles for growth, including:
- Mutual funds (most common)
- Stocks
- Bonds
- Money market account
Variable life insurance puts you in the driver’s seat once the policy is issued. You get to choose what premiums you pay – as long as they meet the policy minimums. You can pay a lump sum into the policy, make payments monthly, or choose to fund it annually.
Here are some of the most often asked questions from people considering a hybrid life insurance policy.
Is Variable Universal Life Insurance Different?
Yes.
While very similar, variable universal life insurance offers the additional benefit of being able to change your death benefit amount.
This is great for someone who has a large chunk of money to fund the life insurance policy. They can use that amount, set their funds, and then allow the cash value to pay the cost of the life insurance premiums.
Of course, proceed with caution. If the market does terribly, or you haven’t picked the right funds to invest in, you could lose that money quickly and be forced to make premium payments. If you choose not to, the policy can lapse and you will not only lose all your funds in the market but also your death benefit as well.
Some companies also charge a fee if you reduce your death benefit amount. Make sure to check and get all the information before you make a final decision if you are looking at this type of hybrid life insurance policy.
Variable universal life insurance offer benefits to the right person. It can be used as a retirement vehicle, help to leave a legacy for your family, and create tax-deferred wealth. But, you really have to have a specific need to have a successful experience.
If you are risk-averse, don’t understand the stock market, and simply need life insurance to protect your family (this includes the vast majority of people), variable life insurance is not for you.
How do I Qualify for Variable Life Insurance?
Getting a variable life insurance policy is not any different than getting any other type of life insurance.
If you agree with the quoted death benefit and minimum premium amount, then the next step is:
- Complete the application
- Complete the medical exam
- Allow underwriting to review the application and exam results
- Get an approval or denial
- If approved, fund the policy
Who is Variable Life Insurance Good For?
Investors and/or high net worth individuals.
Variable life insurance is not a “set it and forget it” type of life insurance policy. If you want to get the full benefit of the policy, then you’ll have to be diligent and hands on. This means:
- Watching your investments
- Updating and changing investment strategy as the market changes
- Ensuring that the premium amount paid into the policy is enough to keep it in force
- Changing the premium invested in the policy if the market dictates
- Understanding the cost of this type of policy (they’re not cheap): fees, expenses, and tax implications
With the flexibility of premiums, you can choose to “overfund” the life insurance policy.
However, great reward typically does not come without risk. If you choose a fund that does poorly, you can see all your money disappear and be required to put even more money into the policy to make sure the life insurance does not lapse.
People who understand the stock market and work to maintain their variable life insurance policy can benefit from possible higher returns if they can bear the increased risk and cost.
Are all variable life insurance policies created equal?
Absolutely not.
Each insurance company’s variable life policy will look different from another’s.
Some allow you more investment options, others only offer one.
Some variable life insurance policies guarantee a minimum death benefit amount, some do not. This means if your market choices do very poorly, not only will your cash value go down, but your death benefit might be at risk too.
Some have more fees and expenses than others. When getting quotes for variable life insurance, make sure you ask about fees and expenses, and what percentage of your money goes where.
Since this type of life insurance includes an investment account, the company is required to give you a prospectus on the funds you plan to invest in. This document provides information that helps you make an informed decision when investing.
The minimum premium amount you pay into a variable life insurance policy is dependent on a few factors:
- Cost of life insurance
- Fees and expense costs of the life insurance policy
- Market performance
Just like you can choose to change the amount you put into the account, the insurance company can also require you to put more money into the policy as well. If they determine that you aren’t funding the policy enough to keep the life insurance in force, they will require you to provide more premium each time you pay to keep it going.
Is this the same thing as adjustable life insurance?
Yes.
Some people call variable life insurance adjustable life insurance because you can adjust your premiums, or stop paying altogether.
This, of course, depends on the cash value built up in the policy. The more cash value you have, the more adjustability you have in the life insurance policy.
Yes.
If your investment choices are doing well and you’ve been paying the minimum premiums or more, you can choose to stop funding the policy completely. Or, if you put in a lump sum of money, you might be able to get away with not funding the policy at all for a period of time.
This is why you will sometimes hear this type of life insurance referred to as flexible premium variable life insurance.
If you plan to do this, however, make sure you do some homework first. Call your agent or insurance company to find out how long you can stop payment before you are at risk of lapsing.
They should be able to give you at least a ballpark idea of how much premium amount is available to pay the cost of insurance, plus fees and expenses.
The cost of the life insurance death benefit amount will be pulled out of the cash value in the policy. This will only continue to happen while there is enough money to pay the premiums.
What Happens to my Cash Value When I Die?
In a whole life insurance policy, your beneficiary only gets the death benefit amount upon the insured’s death. Any cash value in the policy goes to the insurance company. If there is a loan on the cash value, the loan is paid in full from the death benefit before the beneficiary receives it.
In a variable life insurance policy, you have options:
- Variable death benefit – your beneficiary gets both the insured amount plus the cash value in the policy
- Level death benefit – the beneficiary only gets the agreed upon death benefit amount and the cash value goes to the insurance company like in whole life insurance
If you choose the variable death benefit option, expect to pay additional fees and/or expenses. Make sure to ask about this specifically if you choose this route.
Also keep in mind that regardless of the type of death benefit you choose, any loan you take against the cash value will be paid in full prior to your beneficiary receiving any money.
Pros and Cons to Variable Life Insurance
Pros
- Ability to grow money through investment choices
- Life insurance and a investment account rolled into one
- Some policies have a minimum guaranteed market return
- Doesn’t require any special consideration to be approved
- Some variable insurance policies offer the choice of changing your premium and death benefit amount
- Can take a loan against the cash value tax-free (but not interest-free)
Cons
- You need to know how to invest in the stock market
- Poor investment choices can cause you to lose your cash value
- The life insurance policy could lapse if not properly funded
- You could be out more money in premiums if your investment choices don’t perform, to prevent the policy from lapsing
- Could be subject to more fees and expenses compared to having separate life insurance and investment accounts
- Could be subject to taxable income if you pull money out of the policy
As you can see, variable life insurance is not for everyone and, in fact, I believe it’s only for a select few.
Are you ready to figure out the best life insurance for you? Whether or not you think variable life insurance is a good option, we can help get exactly what you need at a price you can afford. Speak to one of our agents or start out online getting a quote today!