Variable Life Insurance (VLI) is a type of permanent life insurance that combines a death benefit with an investment component, offering both life insurance coverage and the opportunity for cash value growth. What sets it apart from other types of permanent life insurance, like whole or universal life, is the investment flexibility it provides. The policyholder can direct the cash value into various investment options, such as mutual funds, stocks, and bonds, which can result in potentially higher returns but also involves more risk.

Key Features of Variable Life Insurance:

  1. Flexible Premiums:
    • Like universal life insurance, variable life insurance offers flexible premiums. The policyholder can adjust how much they pay into the policy, allowing for flexibility in terms of premium payments. However, the cost of insurance remains consistent or can increase as you age, which means the premium needs to cover both the death benefit and the insurance costs.
  2. Investment Component:
    • Cash Value Growth: A portion of the premiums goes into a separate account, which can be invested in a variety of options chosen by the policyholder. These options typically include a mix of stocks, bonds, and mutual funds. The performance of these investments directly impacts the cash value of the policy.
    • Investment Risk and Reward: Since the cash value is tied to the performance of these investments, it has the potential for high returns. However, the value can also decrease if the investments perform poorly, introducing an element of risk. The policyholder bears the investment risk, and there are no guarantees on the returns.
  3. Death Benefit Options:
    • Option A (Level Death Benefit): The death benefit remains fixed, and the amount of the death benefit stays the same over time. The cash value grows separately from the death benefit.
    • Option B (Increasing Death Benefit): The death benefit increases to include the policy’s accumulated cash value, meaning the payout to beneficiaries can grow over time as the investments perform well.
  4. Cash Value Access:
    • Loans and Withdrawals: As the cash value of the policy grows, you can take out loans or make withdrawals against it. Keep in mind that any loans or withdrawals will reduce the death benefit and may incur interest charges. If the loan isn’t repaid, it will be deducted from the death benefit.
    • Tax Advantages: The cash value grows tax-deferred, meaning you don’t pay taxes on the gains until you withdraw them or take out a loan.
  5. Policy Flexibility:
    • Adjustable Death Benefit and Premiums: The death benefit and premiums in a variable life insurance policy can be adjusted (subject to certain limits). This flexibility allows the policyholder to adapt the policy based on changing financial circumstances.
  6. Investment Choices:
    • Variety of Investment Options: VLI policies typically offer a range of investment choices, from conservative bond funds to more aggressive stock funds. The policyholder can select their preferred mix based on their risk tolerance and investment goals.
    • Performance Impact: The returns on these investments directly affect the cash value of the policy, which can increase or decrease depending on market performance. This makes it more volatile compared to other forms of life insurance.

Why You Might Need Variable Life Insurance:

  1. Investment Growth: If you’re looking for a life insurance policy that offers the potential for higher growth of your cash value, variable life insurance may be a good choice. If the investments perform well, the cash value can grow significantly, providing more money to access in the future.
  2. Flexibility: If you want flexibility in adjusting premiums, the death benefit, and your investment choices, variable life insurance offers the adaptability to meet changing needs.
  3. Long-Term Coverage: Like other forms of permanent life insurance, variable life insurance provides coverage for your entire life, ensuring that your beneficiaries will receive a death benefit when you pass away, as long as the policy remains in force.
  4. Estate Planning and Wealth Transfer: Variable life insurance can be a useful tool for estate planning, providing a death benefit that can help cover estate taxes or provide for heirs. The policy’s cash value may also grow, offering potential financial resources for your family.

Considerations:

  1. Investment Risk: The most significant factor to consider is that the cash value is subject to market risk. If the investments underperform or lose value, your cash value could decrease, and the death benefit could be affected. There are no guarantees, so this type of policy can be more unpredictable compared to whole life insurance or universal life insurance.
  2. Complexity: Variable life insurance is more complex than term or whole life insurance, requiring you to understand both the insurance and investment components. Managing the policy’s investments and adjusting premiums and death benefits can be difficult without regular oversight.
  3. Higher Costs: Variable life insurance policies tend to be more expensive than term life policies or whole life insurance due to the additional investment component and the flexibility provided.
  4. Need for Active Management: Since the cash value is tied to investments, the policyholder must actively manage their investment choices and periodically review the policy to ensure it aligns with their financial goals. This may not be ideal for someone who does not want to actively monitor or manage investments.

Example:

  • Suppose you buy a variable life insurance policy with a $500,000 death benefit. You choose to invest your cash value in a mix of stock and bond funds. If your investments perform well, your cash value might grow to $200,000 over time, and your death benefit would increase accordingly (if you have Option B). However, if the stock market experiences a downturn, the cash value could decrease, potentially reducing your death benefit.

Conclusion:

Variable life insurance is a flexible, permanent life insurance policy that offers the opportunity for cash value growth through investment in various assets like stocks, bonds, and mutual funds. While it provides lifelong coverage and the potential for significant cash value accumulation, it also carries more risk due to the investment component. It’s ideal for individuals who are comfortable with market risk and want the ability to actively manage their investments, but it’s not the best choice for those seeking guaranteed, predictable returns. If you’re interested in growth potential and flexibility and are willing to manage the associated risks, variable life insurance can be a valuable financial tool.