Variable Life Insurance
As the name implies, variable life insurance offers policyholders multiple choices to generate income with investments. Many other types of policies apply premiums to grow the cash value of the policy until it matures. Variable life policies allow investment options of all kinds, including bonds and stocks. Therefore, they result in premiums that vary depending on how chosen investments perform.
In many ways, variable life insurance policies are a form of permanent life insurance because they offer a death benefit. However, cash value must be maintained to prevent policy lapse. Underperforming investments can cause the policyholder to lose funds. As with universal life insurance, premiums decrease when investments are doing well. Should investments begin to lose money, premiums increase in order to maintain the policy.
Once the cash value of a variable life insurance policy reaches the death benefit amount, it is considered a matured policy. Premiums no longer need to be paid. Additionally, should the policyholder’s investments do better than expected, the death benefit increases to help beneficiaries even further with their costs.
In some instances, a variable life insurance policyholder may take out a loan against his or her accrued cash value. However, all loans must be repaid with interest to maintain the policy. Due to the nature of variable life insurance policies and to the fact that policyholders may invest in the stock market, the U.S. Securities and Exchange Commission has a degree of involvement with these kinds of plans. Approved brokers who have passed state life insurance examinations are the only individuals who may sell variable life insurance.
This form of policy also offers a tax advantage. A person does not pay federal income tax on paid-out benefits. He or she may annually gift cash to children for investment in variable life policies. In the future, the children may take out loans against the cash value to fund their schooling or other expenses without tax penalties. Some of these policies offer a guaranteed death benefit once they have been in force for a designated number of years.
To determine if a variable life insurance policy is the right fit, discuss all needs with an experienced, approved broker.