What Is Variable Life Insurance?
A form of permanent life insurance, variable life insurance offers the flexibility of universal life coverage with additional opportunities for investment. Also called variable universal life, variable life policies allow the insured to change the death benefit as well as the amount and timing of the premium payments. Additionally, variable life policyholders have the ability to invest the cash value of the policy in various funding options that are professionally managed. Read on for more information on variable life insurance, including its uses and risks.
Basics of Variable Life
The hallmark of a variable life insurance coverage is the policyholder’s ability to choose how the cash value is invested. Variable life policyholders can invest their cash value in a variety of investment vehicles, including mutual funds. How the cash value funds are allocated is entirely up to the policyholder. In fact, the name “variable life” refers to the policyholder’s ability to invest the policy’s cash value in different accounts with varying values. The values vary according to the performance of the stock and bond markets. The premiums for variable life insurance policies can be deducted from the cash value of the policy and can vary tremendously. Potentially, premiums can range from no payment in one month to the maximum payment permitted by the IRS in another month depending on the performance of the policy’s investments.
Why Variable Life
Policyholders who opt for variable life usually do so as a supplementary investment vehicle. Most financial experts advise against using variable life insurance as a primary investment, but it is a relatively safe way to complement more lucrative investments. The typical uses of variable life insurance are outlined below.
- Tax benefits. Variable life insurance offers tax-deferred growth of the policyholder’s investments. Especially for policyholders in higher tax brackets, this can result in substantial tax savings.
- Retirement planning. Variable life insurance policies usually allow the policyholder to take out loans against the cash value of the policy tax-free. Policyholders can then use these loans as a way to supplement retirement income.
- Estate planning. Policyholders who want to avoid or reduce the estate tax burden on their heirs can use a variable life insurance policy to set up a life insurance trust for tax savings.
- Education funding. Loans against the cash value of variable life can help pay for the education of the policyholder’s children.
Variable Life Risks
Variable life insurance policies are not without risks. Usually, the premiums of variable life insurance policies are based on term life rates, which means the policy could become unaffordable as the policyholder ages. Eventually, the money the insured spends on the policy could exceed the savings the coverage provides. Additionally, because the premiums of variable life are invested in stocks and bonds, the policyholder assumes a significant investment risk. If the investments the policyholder selects perform poorly, it will affect the death benefit and cash value of the policy.