What Is Variable Life Insurance? Who Needs It?

Insurance terminology can be confusing, including the phrase variable life insurance. What exactly is this type of coverage? Who should have it?

What it is

Variable life is a type of permanent or whole life insurance. The policy remains in effect until you either cancel the policy or you die. Variable life has a cash value that accumulates over time and may serve as a long-term investment tool (not a primary one, but one that’s considered additional to other investment vehicles). The accumulated cash value is tax-exempt.

  • Required guaranteed annual premiums
  • Guaranteed minimum death benefit
  • No guaranteed cash value
  • You have to select the investments for your own policy
  • Investment opportunities are usually mutual funds (money market to aggressive-growth type funds)
Flexibility Features

You can use the cash value in your variable life insurance policy and put the funds in different accounts that may earn higher dividends. Making the switch of your money incurs no penalties. Unlike some other types of life insurance policies, if you miss one or two premium payments, as long as you pay more the next month after you miss, your variable life policy remains in good standing. Death benefits remain intact if you die before you reach 100 years of age, covering costs for burial, funeral and other expenses.

Risks

There’s no question that this type of insurance policy carries risks – you’re placing cash value in accounts that may lose money. There’s no guaranteed cash value.

When to Purchase the Policy

It’s best to buy this type of policy when you’re young and healthy. This way you’ll get the most attractive premium rates, much less than if you buy variable life later on when your health may already have deteriorated.

Who Needs Variable Life Insurance

If you’re looking for a life insurance policy that offers the potential for tax-exempt accumulation over time, are able to pay the premiums, and are knowledgeable about and comfortable with the risk of investments, then variable life insurance is probably right for you. According to A.M. Best, a variable life policy can supplement a retirement income or increase death benefit without having to go through additional insurance underwriting.

In the end, it isn’t so much a question of who needs it as much as who can most benefit from it. If the above scenario fits you, then you should choose – or at least consider – variable life insurance.

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