If you are searching for life insurance coverage, one question you will likely ask is, “what type of life insurance policy is right for me?”
Let’s take a minute to answer this, and then shift to speaking strictly about variable life insurance.
What Types of Life Insurance Are There?
There are many different types of life insurance.
Life Insurance can be broken down into two major types: term life insurance policies and permanent life insurance policies.
Let’s take some time to understand the differences between term life and whole life insurance before we dive deeper into variable life insurance.
What is the Difference Between Term and Whole Life Insurance?
What is Term Life Insurance?
Term life insurance policies guarantee coverage at a consistent premium over a specified term (hence the name) and is usually the cheapest form of life insurance.
For example, a 30-year-old man buys a 30 yr policy for 500k. The policy will expire in 30 years at the current premium. You can extend coverage but usually at a significantly higher cost. Term life insurance always terminates during a person’s lifespan.
What is Whole Life Insurance?
Whole Life Insurance is a type of Permanent life insurance policy, which covers the full lifespan of an individual. As long as you continue paying your premium, the policy will cover you throughout your entire life.
Whole life insurance policies also have an investment or savings component. There are a variety of permanent policies. Whole life was the original, and from there you have multiple variations such as:
We are going to examine one particular kind of permanent policy — variable life insurance.
How Does Variable Life Insurance Differ from Other Types of Permanent Insurance?
Whole life insurance provides coverage and has a cash value. A portion of the premium is set aside in an account and continues to grow over the life of the policy.
Let’s elaborate on the 3 most common types of whole life insurance we listed above, to give you a better idea of how variable life insurance is different.
3 types of whole life insurance
1. Guaranteed universal life offers coverage that is guaranteed. Death benefits are paid out as long as the policy premiums have been paid. These policies are commonly sold up to age 75, 85, 90, 100 and even up to 121.
These policies do not build cash value over time. They do however have level (rates that stay the same) life insurance premiums throughout the duration of their policy.
2. Universal life provides life insurance but ties the cash portion into the returns of the life insurance company. This cash value can be borrowed against, or given to beneficiaries upon payout of the policy.
A certain minimum amount of returns is guaranteed every year, and additional returns can vary based on the portfolio performance of the insurer.
Premiums are set to be the same each period.
3. Variable life also offers investment portfolio options. The difference is, you have more of a say in where these funds are invested.
Also, your premiums, death benefit, and cash value can fluctuate over time, as you have the option to adjust them in order to build your policy as you see fit.
The easiest way to think of variable life is to imagine a combination of a life policy plus a mutual fund.
A portion of your premium goes toward the life insurance and the remainder funds your investment portfolio.
Combining the two together provides unique advantages that other forms of permanent insurance do not give you. Also, it does something most investment products can not do….offer a death benefit.
Investing in Variable Life Insurance is definitely the right fit for someone looking to build cash value over time through investing, while still being offered a death benefit.
The Two Components of Variable Life
Let’s look at the two different components inside of variable life: Investments and Insurance.
Rather than look at the life side of the policy, let’s walk through the investments first. Understanding the investment vehicle will impact the life side of the policy, and create options for the policyholder that don’t exist with other permanent life products.
A portion of the premium goes straight into an investment account. The account much like a mutual fund is a collection of stocks and bonds. The beauty of the variable account is control.
The policyholder can choose exactly which fund he wants his investment portion to fund. Every company that sells variable life has created a wide variety of funds a policyholder can choose from.
Each fund inside of the policy can be chosen based on a policyholders risk tolerance. Many of the funds allow for highly aggressive growth while others are much more conservative with slow growth rates.
Like any investment, the upside that comes with aggressive growth is balanced by the risk of potential losses. The more conservatives fund will never see the high growth rates but are much safer against losses.
How to Get the Most Out of Your Variable Life Insurance Policy
Knowing which fund to pick is a key reason you should use an independent agent to provide counsel and advice. Your age and long-term financial goals will determine which funds are relevant for you.
Most policies come with a wide range of flexibility and allow you to move your investments to other funds over time as you need to be aggressive or conservative change.
What are the Benefits of Variable Life Insurance?
Performance of Your Investments
How do the investment portions of the policy perform relative to the stock market? On average, funds will mirror the returns in the stock market and index funds.
Again, performance is tied directly to the individual funds chosen. While you don’t need to monitor the investment portion on a weekly or monthly schedule, it helps to keep an eye on it and review with your agent every 1-3 years.
Like other permanent policies, variable life policies allow you to borrow or withdraw from the investment portion. This can create a nice safety net for a policyholder outside of the life insurance benefits.
A loan can be taken out against the cash, and then over-time pay it back into the investment side. Withdrawals of cash can take place, but in doing so there may be tax consequence against the investment gains.
Taxes against variable policies are unique. There are only tax consequences when a policyholder decides to withdraw money from the investment account. In doing so, taxes will be owed against any gains on that portion of the money.
However, upon the policyholders’ death, the beneficiaries will receive not only the death benefit provided by the life insurance but any remaining investments. Those returns are exempt from taxes. Because of this feature, variable life should be considered as part of estate planning to safeguard money from estate taxes.
Coverage Lasts a Lifetime
Variable life will not expire during your lifetime, unlike a term policy. As long as premiums continue to be paid, life coverage will continue no matter when you die.
Variable Life Insurance Premiums
Variable life insurance also allows customers to reduce or increase coverage through the policy life. This is especially beneficial as a customer ages.
The need for life insurance may be reduced as dependents decrease and other retirement accounts increase.
A policyholder can reduce coverage and move the difference in premium into the investment portion, or decrease the overall monthly premium. Increasing coverage is possible, but in doing so some companies may require supplemental apps with medical testing.
Building Cash Value with Variable Life Insurance
Over time, a variable life insurance policy can actually make you money! Yes, I said it can make you money. They can also pay for themselves.
When the investment portion is large enough, a policyholder can choose to have the investments pay the premium of the life insurance. In doing so, there is no cost for the insurance at this point. The earnings on the policy pay it.
Who is Variable Life Insurance Best for?
Everyone needs life insurance, but who is the perfect buyer for variable life insurance?
Many financial planners will instruct their clients to buy term and invest the difference. The problem with that is most people do not invest the difference. They eventually run out of life insurance and have not investments to self-insure. This is unbelievably common.
Most of us need someone to hold our hand and force us to invest. Variable Life is a great product to automate that portion of your finances. Should it be your only investment product? No, but it makes for a great option in your portfolio giving you a dual benefit of insurance and investment.
It is easy for an inheritance to be eaten away by taxes. When that happens your heirs are left with much less than you would have hoped they would have. You can protect a portion of your financial legacy by using investments such as variable life that provide tax free investment growth.
You have been disciplined with IRAs and 401k and all your tax-deferred accounts are maxed out. The Variable Life policy is another tool to place money about protect your capital.
Best Variable Life Insurance Companies
In order to help you in your search for the best variable life insurance company for your needs, we compiled this list of the best variable life insurance companies:
|Company||J.D. Power Rating||Customer Satisfaction|
|Prudential||777||4.3 / 5|
|Transamerica||780||4.2 / 5|
|Minnesota Life||777||4.1 / 5|
|Protective Life||774||3.9 / 5|
How We chose our best variable life insurance companies
We compiled this list of the best variable life insurance companies based on 4 key factors:
When choosing a life insurance company, you will often find the best value at the intersection of these 4 traits.
The best life insurance companies will always be reliable, dependable, affordable, and have a high degree of customer satisfaction.
Best Variable Life Insurance Rates
Variable life insurance is actually quite affordable, especially if you purchase it at a young age.
Life insurance costs are determined by assessing risk. This process of assessing the risk of an applicant is called underwriting.
When it comes to determining the cost of a life insurance policy, underwriters often take in the following factors:
While many times, rates can be differnt for each individual due to the complexity of the factors taken into account, we wanted to provide some example variable life insurance rates.
Below are some variable life insurance rates for males and females in specific age groups (25, 35, 45, 55, 65). All applicants are in excellent health, and seeking a $500,000 face value policy.
Variable Life Insurance – Wrapping it Up
Variable Life is a creative investment product providing more than just a death benefit. Because of the ability to personalize the product, there are a wide variety of options among multiple companies. An independent insurance agent to help you determine if this a good fit for your own financial goals.
Our independent life insurance agents work with dozens of life insurance companies to help secure the best variable life insurance rates for our clients on a consistent basis.
Speak with an agent today for free, and begin understanding the life insurance options open to you, and which policy is best for you and your family.
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