Variable Life Insurance Policy: Understanding The Fine Print

A variable life insurance policy is a policy that builds cash value over the course of the life of the policy. The cash value you build in your variable life policy can be invested, and the investment is controlled by the insured, much like a retirement or 401(k) investment. Because you have control over the way your cash value is invested, and each area in which you invest can pay out a different rate of return, the policy has a variable value.

Understanding Your Variable Life Policy

Variable life policies fall under special jurisdiction with the IRS. The policy can only be sold by a licensed, authorized dealer who has received the appropriate securities training. Your investment in a variable life policy can provide you with a great deal of tax deferred cash value.

In fact, because it is a life insurance product, the cash value of the policy and the money you make on investing that value is not taxable in most cases, allowing you to reduce your taxable income by a significant portion.

Advantages of Variable Life Policies

In addition to the tax advantages of the policy, it is also a method used by wealthier investors to provide untaxed cash to heirs and dependents. Because loans can be taken against the cash value of the policy, wealthy parents may place funds in their children's variable life policies without having to pay taxes. The child can then take an untaxed loan against the cash value.

The Fine Print

  • Because the insured has control of the investment of the cash value of the policy, the insured is also the one who incurs the risk of loss, not the insurance company. While there is potential for great returns, there is also potential for great loss.
  • The cost of variable life insurance is based on age and health and the premiums will continue to increase, making it a more costly form of insurance than whole life or universal life.
  • The risk of a policy lapsing is much higher than other types of life insurance policies. This type of life insurance is marketed to those in the wealthiest tax brackets.
  • Variable life is one of the most complicated life insurance products on the market. It is easy to misunderstand and can be misrepresented if sold by someone not properly trained.
  • Variable life is often marketed as a life insurance offering that can help with college tuition planning, estate planning, and retirement. However, the actuality of being able to use the insurance as marketed is often much more limited than it appears. It is critical that you take the time to understand the policy before investing in this type of life insurance.

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