Characteristics of Variable Life Insurance Products
Characteristics of Variable Life Insurance Products
Although variable life insurance products pay out a death penalty when the policy holder dies, it can actually be looked at as more of an investment vehicle for your cash. Part of the premiums you pay for your insurance can be reallocated to other accounts that allow you to earn returns that add to the value of your life insurance. For example, you can invest part of your premium into a mutual fund or stocks. When the fund or stock does well, any return you earn will be added to the cash value of your variable life insurance policy.
This is the most defining characteristic of this type of insurance policy. Another characteristic is it's similarity to universal life insurance when it comes to the payment of premiums. Policy holders have the flexibility each month to choose whether to pay the minimum premium for that month, pay the maximum amount allowed by the Internal Revenue Code for insurance policies or to not make a payment at all and instead let the interest they earned during that month pay for the premium. You have to be careful here, however. Consistently paying the minimum or not paying the premium at all can have an adverse affect on the growth of the cash benefits of your policy.
Another thing about a variable life insurance policy is its tax deferred status. Death benefits are also not subject to income taxes although they could be subject to estate tax in certain situations. Contributions to this type of insurance policy are unlimited. Additionally, benefits can be paid out in one of two ways. The beneficiary can receive a fixed death benefit or they can get the variable death benefit with will include the face value of the insurance plus the cash value available in the account.
But variable life insurance is not without risks. Because of the possibility of investing in stocks and bonds, it is actually considered a security contract. The money you invest is not protected and you could lose everything, outside of the death benefit, if your investments do poorly. The cost of this type of insurance is prohibitively expensive. If you become dependent on the interest rate to pay the premiums, you risk having the policy cancelled if you do not earn enough returns and are not able to pay the premium out of pocket. This type of insurance requires that you know a lot about investing. Therefore, you will want to do your research to ensure that this is the type of policy you want.
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