Variable Life Insurance: Multiple Funds In One
What puts the "variable" in "variable life insurance
?" This kind of life insurance earns its name because it allows you to take a portion of your premium and distribute it to a separate account. This account is composed of a variety of investment funds from the insurance company's portfolio, including money market funds, equity funds, bonds, and more. As a result, the ultimate value of the death benefits is tied to the performance of these funds, making it a variable.Because the value of the death benefits is tied to the performance of the investment funds, it can go up and down. However, the majority of variable life insurance plans feature a guaranteed minimum. But keep in mind, while this guaranteed minimum applies to the overall value of the death benefits to be paid off, there is usually no guaranteed minimum when it comes to the cash value of the policy which can fluctuate quite a bit for the duration of the coverage.
Due to the investment risks involved, variable life insurance is also considered a securities contract, in addition to being a variety of life insurance coverage. As a result, variable life insurance is regulated by Federal Securities Law.
Benefits of Variable Life Insurance
One of the major pros of variable life insurance is that allows you to pursue a variety of investment options while not being taxed on the earnings. The earnings will eventually be taxed once the policy is redeemed. A savvy investor can take the interest earned from the investment fund and apply it against the premiums, lowering the overall cost of the policy.
Overall
Variable life insurance policies may seem expensive when compared with other types of life insurance coverage but they also come equipped with a number of advantages. Chief among these advantages is the potential to reap tax-free profits. This can come in especially handy when a particularly large benefit is at stake, allowing the policy holder to provide their beneficiary with a sizable payout, tax-free. Heirs can often also borrow money against the overall value of the variable life insurance policy.
Variable life insurance policies are usually known for offering a wide range of investment opportunities. Although the exact amount of selections differs from company to company (and with each policy as well), it's becoming increasingly common for insurance companies to provide a sizable variety of investment opportunities within a policy. It's not unusual for a variable life insurance policy to now offer over 50 different accounts across a range of asset management styles.
With so many different accounts and investment opportunities to choose from, another advantage of variable life insurance is that the policy holder is free to change their investments, free from any taxes or additional charges. This allows for a highly flexible mode of investing. While many insurance companies set a yearly limit on any investment changes, it is usually a relatively accommodating amount, such as 12 changes a year.
Overview of Variable Life Insurance Applications
Although variable life insurance coverage is often more costly than other kinds of coverage and comes with a certain measure of built-in risk, it is still an extremely popular kind of insurance thanks to its many advantageous features.
Financial Protection
Like all life insurance plans, variable life insurance can be used to provide a family with a certain degree of financial security following the death of a family member. However, the potential to amass a much greater (and tax-free) payout, thanks to the investment funds, can lead to a greater amount of financial protection.
Taxes
Thanks to its tax-deferment feature, variable life insurance can be especially advantageous to those in a higher tax bracket. If the policy is funded highly enough, the tax advantages could potentially offset the cost of the policy. These advantages can be applied in several ways, such as:
Education Planning
If a variable life insurance fund is started early enough in life, the overall cash value can be utilized to help in funding a child's higher education. Children with a variable life insurance policy might also better qualify for federal financial aid, as the fund's cash value is not taken into account by the government when reviewing things like the expected family income.
Retirement Planning
Provided that the policy holder will not be retiring in the near future, variable life insurance can be used as a tax-advantaged source of income in retirement, thanks to its tax-free policy loan status.
Estate Planning
Variable life insurance policies can also sometimes be used as a means to circumvent estate taxes by setting up a life insurance trust.
As with any kind of investments, variable life insurance requires you to take on a certain degree of risk. Although the level of risk is somewhat capped by the guaranteed minimum payout, you're still taking chances with your money. For example, if you plan to apply the earned interest toward your premiums, under performing funds can suddenly leave you with a higher premium than you can afford. You'll have to decide for yourself whether the benefits outweigh the risks.
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