What differs variable life insurance from whole life insurance and universal life insurance is that policyholders are able to choose how their premium payments are distributed across accounts rather than their insurance providers choosing for them. Some of these account choices typically include bonds, mortgages, common stocks and money market accounts. Variable life insurance tends to be more risky to policyholders than other cash value insurance policies, but there is also the possibility of greater returns. As a matter of fact, investing a variable life insurance is so much like regular stock investing that the agents who sell it must be registered with the U.S. Securities and Exchange Commission and be licensed securities dealers.
In the terms of a variable life insurance policy, the cash value and death benefits will vary based on the value of the policy’s underlying investments. The benefits increase if the value of the accounts increases. The reverse is true as well, subject to the guaranteed minimum. The benefits are payable as long as the premiums are paid. Policyholders can also choose an increasing death benefit that includes the face amount plus the value of your funds. One thing to keep in mind is that although most variable life insurance policies guarantee death benefit will not fall below a specified minimum, a minimum cash value is rarely guaranteed. Because of the investment risks with a variable life insurance policy, it is considered a securities contract, regulated under federal securities laws and must be sold with a prospectus.
When you take a variable life insurance policy, you assume the investment risks such as when investment funds perform poorly and less cash is available to pay the premiums. Therefore, you may have to pay more to keep the policy, even if it’s more than you can afford. Your cash or death benefit may also decline, although not below the defined level. Also, during your lifetime you will not be able to withdraw from the cash value. At the same time, variable life insurance policies allow you participate different investment options and not be taxed on your earnings until the policy is surrendered. Interest earned on these investments can be applied toward the premium and possibly lower the amount you pay.
Investment management fees are assessed on all investment options with variable life insurance policies. They will vary from option to option and are deducted on a daily basis. Variable life and variable universal life insurance policies usually combine a death benefit with an investment account that can be distributed among the various investment options. Variable life and variable universal life insurance policies have many different types, but most will include charges for insurance cost, expense and mortality risks and administrative fees required to operate to reduce the cash value of the variable life insurance policy.
