Variable Life Insurance

Definition

Variable life insurance is a type of permanent life insurance that combines a death benefit with an investment component. The cash value of the policy can be invested in various separate accounts, similar to mutual funds, which allows for the potential growth of cash value based on the performance of those investments. This means that the policyholder can adjust their investment options over time, providing flexibility in how the cash value accumulates and how the death benefit can change.

5 Must Know Facts For Your Next Test

1. Variable life insurance allows policyholders to select investment options that can lead to varying cash values and death benefits based on market performance.
2. The premiums paid into a variable life insurance policy are flexible, meaning that policyholders can increase or decrease payments within certain limits.
3. The cash value grows tax-deferred, meaning that policyholders do not pay taxes on any gains until they withdraw them.
4. Unlike whole life insurance, where the death benefit remains level, the death benefit of a variable life insurance policy can fluctuate based on the performance of the investments.
5. Policyholders have the ability to take loans against the cash value of their variable life insurance, but this can reduce both the cash value and death benefit if not repaid.

Review Questions

• How does variable life insurance differ from other types of permanent life insurance regarding cash value and investment options?
  • Variable life insurance differs from other types of permanent life insurance by allowing the policyholder to invest the cash value in various separate accounts, leading to potentially higher growth compared to fixed cash value policies. In contrast to whole life insurance, which offers guaranteed growth, variable life policies have fluctuating cash values and death benefits based on investment performance. This gives policyholders more control over their investments and potential returns but also involves greater risk.
• Discuss how the flexible premium payment feature of variable life insurance can impact a policyholder's financial planning.
  • The flexible premium payment feature of variable life insurance allows policyholders to adjust their contributions according to their financial situation. This means they can pay higher premiums during times of financial stability and lower them when finances are tight. Such flexibility can help manage budgets better and ensure continued coverage without being locked into rigid payment schedules. However, it also requires careful planning to ensure sufficient contributions for maintaining desired cash values and death benefits.
• Evaluate the implications of market fluctuations on the benefits provided by variable life insurance, and how this impacts a policyholder's long-term financial strategy.
  • Market fluctuations significantly impact the benefits provided by variable life insurance since both cash value and death benefits can rise or fall with investment performance. This volatility means that policyholders must be proactive in managing their investments within the policy, adjusting their strategies as needed to align with their long-term financial goals. Additionally, this uncertainty underscores the importance of diversification in investment choices and having a clear understanding of risk tolerance when integrating variable life insurance into an overall financial strategy.

Related terms

Cash Value: The amount of money that accumulates in a permanent life insurance policy, which the policyholder can access or borrow against.

Death Benefit: The amount paid to beneficiaries upon the death of the insured, which can vary in variable life insurance depending on investment performance.

Separate Accounts: Investment accounts within a variable life insurance policy that hold different portfolios of stocks, bonds, or mutual funds.