Variable Life and Variable Universal Life Insurance in the USA

Variable life insurance and variable universal life insurance are types of permanent coverage that allocate cash value to investment subaccounts. They’re designed for people who:

  • Plan to pay active attention to their life insurance.
  • Can fund a policy heavily in its early years.
  • Are willing to add stock market risk to their life insurance.

For those people, variable life and variable universal life offer the most potential growth of any type of life insurance — but they also come with some of the biggest risks.

Variable life insurance and variable universal life insurance are two popular options for individuals seeking both life insurance protection and investment opportunities. These types of insurance policies offer flexibility and the potential for cash value accumulation. However, they also come with risks and complexities that policyholders should thoroughly understand before making a decision.

How does the cash value work?

Like all permanent life insurance, variable life and variable universal life policies come with cash value. You pay your premium — the cost of insurance and other fees are taken out — and the rest is added to your cash value.

With any “variable” policy, you’ll be able to choose how your cash value is allocated, with some limitations. Your insurance company will let you know your options, and then you can choose based on your investment strategy.

If these subaccounts do well, you’ll increase your cash value. If not, your cash value will decrease. If the cash value exceeds a certain amount, the death benefit will increase. Note that if the cash value reaches zero, your policy may terminate. In addition, variable universal products often don’t come with a guaranteed death benefit.

If you’re thinking about buying either version of variable life insurance, make sure you understand the risks and policy structures before making a purchase. When buying any permanent life insurance policy, it’s helpful to consult a fee-only life insurance consultant who can help you understand all the financial implications of a policy.

Variable Life Insurance

Variable life insurance is a type of permanent life insurance that provides a death benefit and an investment component. Policyholders pay premiums, part of which goes toward the cost of insurance, and the remainder is invested in separate accounts that function similarly to mutual funds. These separate accounts invest in stocks, bonds, and other securities chosen by the policyholder, offering the potential for growth.

One key feature of variable life insurance is the ability to adjust the death benefit and premium payments, within certain limits, to accommodate changing financial needs. However, the cash value of the policy is subject to market fluctuations, meaning it can decrease if the investments perform poorly. Policyholders bear the investment risk and must carefully monitor and manage their policy’s performance.

Variable Universal Life Insurance

Variable universal life insurance combines the features of variable life insurance with the flexibility of universal life insurance. Like variable life insurance, policyholders can allocate premiums to separate accounts and choose investment options. Additionally, they can adjust the death benefit and premium payments over time. However, variable universal life insurance offers more flexibility in terms of premium payments and death benefit adjustments.

One significant advantage of variable universal life insurance is the ability to use the cash value to cover premiums or make partial withdrawals, subject to certain conditions. This flexibility can be valuable in times of financial need or to take advantage of investment opportunities.

Considerations Before Purchasing

Before purchasing variable life insurance or variable universal life insurance, individuals should consider several factors:

  1. Investment Risk: Both types of policies expose policyholders to investment risk. Market fluctuations can affect the cash value of the policy, potentially reducing its value.
  2. Cost: Variable life insurance and variable universal life insurance tend to have higher premiums compared to term life insurance due to the investment component and administrative fees. Policyholders should ensure they can afford the premiums over the long term.
  3. Policy Performance: Policyholders must actively manage their policies by monitoring investment performance and making adjustments as needed. Failure to do so could result in inadequate coverage or diminished cash value.
  4. Tax Implications: The cash value growth in variable life insurance and variable universal life insurance policies accumulates on a tax-deferred basis. However, withdrawals and loans may be subject to income tax and penalties if not handled properly.
  5. Financial Goals: These types of insurance policies can be suitable for individuals seeking both life insurance protection and investment growth. However, individuals should assess their financial goals and risk tolerance to determine if variable life insurance or variable universal life insurance aligns with their objectives.

Benefits of variable universal life and variable life insurance

Variable life and VUL both give you more control over your investments and a higher potential return than other life insurance options. For people who see life insurance as both a form of protection and an investment, variable options can solve two problems at once.

Variable universal life provides the most life insurance control and flexibility. Premiums can move up and down, death benefits can be increased or decreased and you can choose to put your cash into a wide range of investment options or fixed-rate subaccounts.

Drawbacks of variable universal life and variable life insurance

Variable life and VUL both combine an investment and an insurance policy. The federal government requires people who sell variable policies to be registered to sell securities — such as stocks — as well as life insurance. That should tell you that variable insurance products are more complex than their vanilla counterparts.

It also highlights the market risks that come with these policies. If the market performs poorly, you could be left without any value in your cash account. Many people prefer less hands-on options with more guarantees.

Variable life insurance and variable universal life insurance offer policyholders the potential for investment growth alongside life insurance protection. However, they come with inherent risks and complexities that require careful consideration. Before purchasing these types of policies, individuals should thoroughly understand how they work, assess their financial needs and goals, and consult with a financial advisor or insurance professional to make an informed decision. By doing so, individuals can maximize the benefits of variable life insurance or variable universal life insurance while mitigating potential risks.

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