Variable life insurance is a permanent life insurance policy that comes with a death benefit and an investment component. The policy has a cash value account that allows you to choose investment options yourself. In contrast, whole life insurance has the insurance company making those choices.
On the other hand, variable universal life insurance (VUL) combines some features of a variable life insurance policy with those of a universal life insurance policy. That is, it allows you to adjust the death benefit amount and the premium payments within some limits.
Those seeking variable life insurance policies will likely find mostly VUL options. That is because many insurance policies no longer offer variable life insurance policies as they did in the past. So, today the two terms are mostly synonymous.
How Variable Life Insurance Works
In similar fashion as other types of life insurance, a variable life insurance policy pays a tax-free benefit to your beneficiaries after your death.
It also includes a cash value component that changes based on:
- The amount of premiums you pay.
- The fees and expenses the insurance company charges.
- The performance of the investments (often similar to mutual funds) you have chose.
- The loans or withdrawals you take from cash value
In sum, variable life insurance gives you the agency to decide how to invest the cash value money. Of course, you will need to make some choices. So if you want a policy you don’t want to actively mind, a variable life policy may not be what you’re looking for.
Nevertheless, buying a variable life insurance policy can let you to gain extra retirement income by taking out loans against the cash value. In addition, you don’t have to pay taxes on the loans (unless you do not pay them back).
The premiums you pay on the policy go toward:
- the actual cost of the life insurance of the person being insured
- the company’s internal fees and charges
- the fees from your investment choices
- your cash value
The policy’s cash value component can contain several sub-accounts. For example, these may include mutual funds, stocks and bonds. There is also an option to put some of the cash value into a non-investment account, or a fixed account, that pays interests on deposits.
However, your premium payments must create sufficient cash value otherwise the policy will lapse.
Variable Life Insurance Death Benefit Options
Some variable life insurance and VUL policies pay your beneficiaries a fixed death benefit amount after you die. The life insurance company then absorbs the cash value.
A policy with a variable death benefit will have a death benefit that increases or decreases based on the cash value amount.
A variable life insurance policy you are considering may have other death benefit options:
- The face amount plus the cash value you accumulated.
- The face amount plus the premium payments you made. (In this case the cash value would revert back to the insurance company.)
So ensure your financial advisor knows the type of death benefit you want, so they can identify the policies with this option.
Is Variable Life Insurance Right For You?
The policy is suitable for those seeking lifelong coverage and who also want to have an active role in their life insurance investments.
However, it is best for people who can afford the losses if the underlying investments don’t perform as well as intended, such as people with considerable wealth. Also those with an appetite for risk and who would want potential growth in their cash value may choose variable life insurance.
Above all, if you choose this policy, make sure you are prepared to examine the policy prospectus and understand it. Especially, the policy fees, guaranteed and unguaranteed cash values and the death benefits.
Tips for Buying Variable Life Insurance
Experts say you should never choose a policy based on the quoted premiums or projected asset growth. That is because regulations in most states allow insurance providers to quote low premiums or project high account growth while charging high costs but without disclosing the higher risk of a ‘premium call’.
A premium call requires you to pay more into your cash value account to keep the policy from lapsing.
Rather choose a policy based on internal policy costs and the historical performance of the investment funds underlying the policy. High internal costs can lead to higher premiums and lower cash value.
Other tips for buying variable universal life insurance include:
- Obtain quotes from several insurance companies through a financial advisor or independent life insurance agent. Quotes for variable universal life insurance policies are usually not available online.
- Examine the policy illustrations, especially the guaranteed parts. Don’t buy a policy only because of non-guaranteed projections that look enticing.
- Look for insurers that charge low internal policy fees.
- Check an insurer’s financial strength, such as AM Best ratings. Since you’re buying a long-term contract, you want to select a company that’s going to be around for the long haul.
- Work with an experienced financial planner or life insurance agent who can help you understand what you’re buying.
Variable Universal Life Insurance | Benefits and Risks
- You can take out loans or withdrawals against the policy’s cash value.
- Cash value will grow on a tax-deferred basis.
- You can use money you take from your cash value for whatever you want, whether to supplement retirement income or for leisure.
- Investment options provide an option to create greater cash value than alternative life insurance types.
- The death benefit is paid to your beneficiaries tax-free.
- Life insurance riders may be available that will add valuable features to the policy, such as a chronic illness, critical illness or terminal illness rider that will let you access money from your own death benefit if you are diagnosed with the condition after buying the policy.
- Poor investment performance can cause you to lose money including the principal.
- Policy loans and withdrawals—or poor investment performance—can reduce a policy’s cash value, potentially leading to a policy lapse.
- Choosing an insurer with high monthly fees can impact your cash value growth because more of your premium money is going toward fees.
- If you take a withdrawal or loan that you don’t pay back, you’ll have to pay income tax on the portion of the money that came from investment gains.
- The insurance companies will charge you fees associated with the investment choices you make.
- There may be a limit to the number of times you can transfer money between investment options each year, such as 25.
- If your investments perform poorly your death benefit amount could go down. However, variable life policies will guarantee a minimum death benefit amount.
Variable Life Insurance Providers
Some of the best variable life insurance providers are:
- Pacific Life
- John Hancock
- Lincoln Financial
- Northwestern Mutual
- Penn Mutual
- Securian Financial