Variable Life—Insurance for the 21st Century
Many individuals view life insurance as a means of providing a financial “safety net” for loved ones after the family provider is gone. While correct, this view may be limited when one realizes that insurance companies work to continually enhance their offerings to give insurance consumers more return for their premium dollars.
One of the most important issues of the 21st century is to find a means to deal with a constantly changing and uncertain economic climate. Families and individuals are concerned with paying current bills, as well as planning for future events and changes in their lives, such as providing college educations for children and comfortable retirement incomes for themselves.
Variable Life Insurance May Meet Varying Needs
If these concerns match yours, variable life insurance may offer an answer that has the potential to help fulfill current investment objectives in the face of changing economic conditions. In addition, as variable life is life insurance, the aim of fulfilling the financial needs of loved ones in the event of your death may be met.
Variable life offers a number of potential benefits:
These features are also available with traditional life insurance, but variable life goes beyond them in several important ways.
- The guaranteed death benefit under a variable life plan is available to help meet final expenses, estate costs, and the continuing living expenses of your loved ones.
- Your premium dollars cover not only the insurance costs of the policy, but also add to the cash value.
- The cash value will grow on a tax-deferred basis and become available to you through policy loans or withdrawals for your individual funding needs.
Control of Your Assets
Premium dollars—typically less premium taxes, additional benefits from riders, substandard risks, sales loads, and expenses incurred in the administration of the policy—are invested in a number of fund choices, such as stocks, bonds, money markets, stock index funds, or a combination of funds. The policyholder decides which funds his or her assets are directed to, based on personal investment strategy, risk tolerance, and financial objectives.
When investing, however, you should be aware that investment returns and principal values will fluctuate due to market conditions. Therefore, when shares are redeemed, they may be worth more or less than their original cost.
As economic conditions change, or the policyholder reaches different stages in his or her investment life, assets may be shifted to more appropriate investment choices. Variable life thus offers the policyholder not only life insurance protection and cash value build-up, but also investment flexibility.
The cash value depends on the performance of the underlying funds and, therefore, cannot be guaranteed. The death benefit may also vary with fund performance but, in most cases, variable life policies guarantee a minimum death benefit equal to the initial face amount upon the death of the insured, as long as required premium payments have been made. Periodic cost-of-insurance, administration, and risk charges are deducted from the cash value account.
Variable life allows for flexibility in the allocation of cash value among various investment funds, as noted above. There is, in addition, flexibility in the payment of premiums, which can benefit the policyholder in two ways:
Safety of Assets
- When personal income undergoes changes, premium payments may be adjusted to meet current financial needs, if sufficient value exists within the contract. The degree of premium payment flexibility varies among variable life policy designs.
- When extra personal cash is available, additional sums may be put into the contract at any time (subject to underwriting and tax restrictions) to help cash value grow more quickly and possibly add to the death benefit.
The use of a “separate account” for assets that support the cash value of variable life is a feature unique to this type of insurance. Generally speaking, assets that support variable life cash values invested in the separate account should be beyond the reach of the company’s general account policyholders, or its creditors if the company experiences financial difficulties. (Death benefits that exceed cash value in the separate account do not have this protection.)
Who can Benefit from Variable Life?
Investors with a need for insurance coverage, and the ability to invest on a long-term basis, can generally benefit from variable life. It is typically purchased by those with college-funding, retirement-planning, or other long-term savings objectives in mind due to the nature of the underlying investment funds, which may or may not perform well over the short term. And, while they watch the tax-deferred growth of their cash values, they have the security of the insurance protection provided.
Variable life may become increasingly popular among higher income investors who wish to defer taxes on current investment income while benefiting from the advantages of mutual fund investing. A qualified financial professional can demonstrate the benefits of variable life and how it can fit your financial strategy in today’s economy.