Variable life insurance is a type of permanent life insurance policy where the face value (death benefit) can fluctuate. The fluctuations are based on the investment performance of a separate account, in which the premiums are placed by the policyholder. Despite these fluctuations, the policy never falls below a guaranteed minimum value.
Key Features
Investment Performance
The death benefit increases or decreases in relation to the investment performance of the separate account holding the premiums. These accounts can include equities, bonds, or a combination of both.
Guaranteed Minimum Value
Even though the value of the policy can change, it will not drop below a guaranteed minimum, providing a safety net for the policyholder.
Level Premiums
Similar to conventional whole life insurance, variable life insurance has level premiums. This means the premium amount remains constant throughout the life of the policy.
Loan and Surrender Values
Variable life insurance policies also offer loan and surrender values, giving the policyholder the ability to borrow against the policy or surrender it for a cash value if needed.
Types of Variable Life Insurance Accounts
Equities-Based Accounts
These accounts invest premium dollars in stock markets, potentially offering higher returns but with greater risk.
Bonds-Based Accounts
These accounts invest in bonds, offering more stable returns compared to equities but usually lower potential gains.
Mixed Accounts
Some policies allow for a diversified approach, combining equities and bonds to balance risk and returns.
Special Considerations
Investment Risks
While the potential for higher returns exists, the policyholder assumes the investment risk. Poor market performance can lead to decreased death benefits.
Policy Management
Policyholders must manage their accounts rigorously or rely on financial advisors to optimize returns and mitigate losses.
Regulatory Aspects
Variable life insurance policies are regulated by both state insurance departments and federal securities agencies, ensuring a degree of protection for investors.
Historical Context
Variable life insurance emerged in the 1970s as a response to the growing complexity of financial markets and consumers’ desire for more investment control over their life insurance policies.
Applicability
Variable life insurance is suitable for individuals looking for permanent life insurance coverage and willing to assume investment risk for potentially higher returns. It is not ideal for risk-averse individuals or those seeking a straightforward insurance product.
Comparisons with Other Insurance Types
Variable Life vs. Whole Life Insurance
- Investment Control: Variable life offers investment options; whole life has a fixed, conservative investment strategy.
- Policy Values: Variable life values fluctuate with investments; whole life’s cash value grows at a guaranteed rate.
- Risk: Policyholder assumes more risk in variable life than in whole life.
Variable Life vs. Universal Life Insurance
- Flexibility: Universal life offers more flexible premium payments.
- Interest Credits: Universal life credits interest based on prevailing rates rather than investment performance.
Related Terms
- Death Benefit (Definition): The amount paid to the beneficiaries upon the policyholder’s death. In variable life policies, this amount can vary based on account performance.
- Premium (Definition): Regular payments made by the policyholder to keep the insurance policy active.
- Surrender Value (Definition): The amount the policyholder receives if they decide to terminate the policy before it matures.
- Loan Value (Definition): The amount that can be borrowed against the policy’s cash value.
FAQs
How often can I change my investment options?
Can the policy lapse if the investments perform poorly?
Do I need a medical exam to qualify for variable life insurance?
References
- “Variable Life Insurance.” Investopedia, https://www.investopedia.com/terms/v/variablelife.asp.
- “The Basics of Variable Life Insurance Policies.” Life Insurance Information Center, https://www.lifeinsurance.com/variable-life-insurance.
- “Understanding Variable Life Insurance.” Financial Advisor Magazine, https://www.fa-mag.com/news/variable-life-insurance.
Summary
Variable life insurance provides a dynamic way to manage life insurance coverage along with investment opportunities. While it offers the potential for higher returns and an adjustable death benefit, it also requires diligent management and carries investment risks. It stands as a versatile yet complex product designed to meet the needs of savvy investors seeking permanent life insurance.
