Variable life insurance policies are a type of whole life insurance which accrues a cash value in addition to offering death benefit protection to the policy beneficiary. Although it is one of many life insurance plans available, in a variable life insurance plan, a portion of your premium dollars may be allocated to a separate account comprised of various investment funds within the insurance company's portfolio, such as stocks, bonds, money market and equity funds. You cannot withdraw from the cash value in your lifetime; however, some plans allow policy holders to borrow against the cash value if they choose to do so. As long as the premiums are covered, this loan may not need to be repaid.
Many variable contracts offer flexible payment plans, allowing policy holders to skip premiums, pay variable rates, or pay in a lump sum. As long the cash value of the policy exceeds its expenses, the policy remains in force and the cash value grows. Because of its cash value, a variable life contract may act as pure insurance, or as a retirement account. The policy generally matures at 100, or at the death of the insured.
Advantages and Disadvantages of Variable Life Insurance
The major advantage of a variable policy is that it acts as a tax shelter for you and your beneficiaries, allowing you to defer taxes on your investment interest until the policy is surrendered. You can also apply your investment interest toward your premiums, potentially lowering your out-of-pocket payments while keeping the policy in effect. However, you should consider the risks of this investment strategy as well as the rewards. If investments perform poorly, there may be less money available to pay the premiums, and you may find yourself paying more than you can afford to keep the policy in force, or the cash or death benefits may decline in value. Because of the associated risks, variable insurance policies are considered securities contracts and are regulated by the Securities and Exchange Commission; they must be sold with a prospectus.
