Financial Tips,  Health Tips

Variable Life Insurance 101

You might be thinking of things you can do to provide for your family in the case of an emergency if you are raising a family; purchasing life insurance is a way to ensure that your family has the means to support itself in the event that you die. Today, there are varieties of life insurance products available in the market. Many people consider a variable life insurance policy after weighing the pros and cons of each type of insurance plan. Variable life insurance is discussed below.

What is Variable Life Insurance?

Designated beneficiaries will receive a benefit payout upon your death under a variable life insurance policy. With variable life insurance, you have the ability to decide what the death benefit payout should be like other life insurance policies. Monthly premiums would be required of you to be paid and these are based on a number of factors which are age, health, gender and lifestyle. As long as you pay your premiums, the policy stays in effect until your death making variable life insurance policies permanent.

What do I need to know about Variable Life Insurance?

There are lots of similarities between variable life insurance and regular life insurance policies, however, there are some differences in their features and they are noted below.

Cash Value – There is cash value for variable life insurance. Cash value means that a portion of your monthly premium payment goes toward the insurance and a portion goes toward a savings account and this is another similarity with a regular life insurance policy.

Where it differs from a whole-life policy is how the cash value is invested. Rather than receiving an interest payment on the balance in a savings account, a policyholder is given the choice to invest in a variety of investment options similar to mutual funds, bonds, equities, and money market funds. These are often referred to as sub-accounts. These investments typically earn a greater return than what you might receive in interest. When the market is performing well, this allows the cash value to grow faster than other types of insurance policies. In some cases, a life insurance company may place a cap on the growth of the investments. If the market is underperforming, the cash value of your variable life insurance policy could fall.

Death benefit – Typically, variable life insurance provides benefits as a level death benefit or the policy value plus its cash value payout. 

  • Level death benefit – This is the amount paid out upon death is stated in the policy.
  • Policy plus cash value – The amount of the policy plus any cash value will be paid out. Under this type of plan, premiums are higher than what is paid under a level death benefit plan

Premium payments – If the investment portion of your policy is not performing as well as expected your premiums can be increased. The insurance company has the ability to raise your premiums to accommodate for the drop in the cash value. 

Fees – Under variable life insurance, fees paid are higher than most other types of insurance policies. This is as a result of each fund that the cash value is invested in that carries with it a management fee. 

Should I buy Variable Life Insurance?

If you are looking for a life insurance policy that has the potential to produce a higher return, a variable life insurance policy might be a good option. This is because it has the capacity of building up a cash value; you could borrow against this or withdraw the funds as needed.

The downside to a variable life insurance policy is its cost. Monthly premium payments are higher than other types of life insurance, such as term-life. Both policies can have the same death payout, yet you will pay significantly less in premiums for a term-life policy than a variable life insurance policy. With its cash value tied to the performance of the investments that you’ve chosen, you could experience a drop in value if returns aren’t as high as expected. If the cash value drops low enough, your monthly insurance premiums could rise.

As much as there are many benefits with a variable life insurance policy, these plans are costly. Go with a regular life insurance policy which may be more cost-effective for your family if you are unable to keep up with the premiums.

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