Variable life insurance is a type of permanent life insurance designed to cover you throughout your lifetime as long as premiums are paid. This policy is particularly suitable for those seeking an investment component alongside traditional insurance coverage, offering the flexibility to manage premiums and a dynamic death benefit.
Features of Variable Life Insurance
- Premium Flexibility: Variable life insurance stands out for its premium flexibility. If your policy’s cash value is sufficient, it can cover the premium payments, allowing you to adjust your payment plans based on your financial situation.
- This flexibility is beneficial during financial uncertainties, allowing options to: Overfund your policy to accelerate the growth of the investment component.
Pay only a part of the premium yourself and let the cash value cover the rest.
Completely offset the premium with the policy’s cash value if it is adequate. - Investment Options: Unlike whole or indexed life insurance, variable life insurance offers a range of investment options that are linked to the financial markets. This linkage means that while there’s a potential for high returns, there’s also a risk of loss, especially if the market underperforms. This could impact the policy’s cash value and potentially lead to a lapsed policy if not managed properly. However, you can mitigate some risk by transferring funds between different investments tax-free.
- Adjustable Coverage: With variable life insurance, you can adjust your death benefits and coverage amount. Some policies allow you to increase the death benefits or boost the policy’s cash value through additional lump sum contributions.
- Death Benefits: The policy offers two main types of death benefits:
- Level Death Benefit: The payout remains equal to the policy’s face value at the time of purchase.
Face Amount Plus Cash Value: This option usually costs more but means beneficiaries receive both the policy’s face value and the cash value.
Challenges of Variable Life Insurance
- Associated Fees: Variable life insurance typically incurs higher fees compared to other types of policies. These can include:
- Surrender Charges: Fees applied if you withdraw cash value or cancel the policy within a certain period.
- Withdrawal Fees: Fees charged for each withdrawal from the cash value.
- Investment Management Fees: Varying costs based on the chosen investment options.
- Sales and Administrative Fees: These cover agent commissions and policy management costs.
- Mortality and Expense Risk Charges: Fees for the insurance component providing the death benefit.
- Policy Loan Interest: Interest charged on loans taken against the policy’s cash value.
- Riders: Additional costs for optional coverage enhancements.
Since variable life insurance policies are regulated as securities, the administrative fees tend to be higher, reflecting the complex nature of managing these investments.
Considerations for Selling Your Policy
Due to the high cost of premiums and potential financial emergencies, maintaining a variable life insurance policy can become challenging. In such cases, a life settlement, where you sell your policy to a third party for a lump sum, might be an attractive option. This allows you to access immediate funds, which can be critical for managing health expenses or other urgent financial needs.
If you are contemplating a life settlement, companies like Harbor Life Settlements can provide guidance and facilitate the sale, ensuring you receive a fair value for your policy.
Conclusion
Variable life insurance offers a combination of life coverage with investment flexibility, making it a powerful tool for those looking to integrate their life insurance with broader financial planning strategies. However, the complexity and cost associated with this type of insurance require a thorough understanding and active management to ensure it remains aligned with your financial goals and circumstances.
