If you’re looking for an insurance policy for life that creates cash value and lets you invest the cash value, think about different life insurance. Based on your needs, flexible life insurance (and the very similar variable universal life insurance) may be a suitable option for your long-term protection, tax planning, and investment needs.
What Is Variable Life Insurance?
The variable life insurance policy is a kind of life insurance that comes with a death benefit and cash value. It is essential to play an active part in selecting investment options to the cash value of your policy, unlike other insurances, such as whole life insurance, in which the investment decisions are made by the insurance company you purchase it from.
Variable universal life (VUL) insurance has the features of a variable life policy combined with elements of a universal life insurance policy. You can adjust your premium payments and the death benefit amount within certain limits.
People who purchase life insurance seeking variable life options are likely to find a lot of VUL choices these days.
How Does Variable Life Insurance Work?
Similar to other forms of life insurance, the flexible life insurance plan provides a tax-free death benefit to your beneficiaries following your pass away.
Variable universal and variable life insurance policies contain the cash value component, which alters based on
- The amount you pay for premiums.
- Costs and fees charged to the insurance provider.
- The performance of the investment (often like mutual funds) you’ve chosen.
- The amount you can borrow or withdraw from the value of cash.
Variable life insurance allows the choice of which investments to make with the cash value. But you have to decide, and if you’re looking for life insurance that you do not have to keep track of, an adjustable life or VUL policy might not suit you.
Life insurance and wealth advisor Guy Baker, founder and managing director of the Wealth Teams Alliance wealth advisory firm, explains that buyers of variable life insurance frequently use the policies to generate additional retirement income through loans against cash value. There is no requirement to pay taxes on the funds borrowed (unless it’s not paid back).
If you are paying premiums for an insurance policy with a variable term that you purchase, the money goes to:
- The exact cost of life insurance is based on the coverage.
- Internal company fees.
- Charges that are related to your investment decisions.
- Your cash value.
The flexible life insurance policy’s cash-value component may include a variety of sub-accounts. These typically include bonds, mutual funds, and stocks. You may also opt to deposit a portion of the cash value in a non-investment account or a fixed account that offers interest on the funds put in, like 3 percent.
It is essential to ensure that your premiums are sufficient in cash value, or your policy could be canceled. If, for instance, you make loans against your cash value, and the insurer subtracts the monthly fees, the value of your cash may fall below the minimum requirement, and the policy could end up in a lapse. In such instances, you must make an additional premium payment to keep the policy in effect.
Choosing a Death Benefit Option for Variable Life Insurance
Specific variable life insurance policies and VUL policies provide your beneficiaries with an amount fixed following your death. If, for instance, the face value of your policy is $1,000,000, that’s the amount your beneficiaries will receive regardless of the value of your cash in the event of your death. Cash value gets transferred to the life insurance company.
A policy with an adjustable death benefit will come with an amount of death benefits that increase or decrease depending on the cash value.
The variable insurance plan that you are looking at could also offer additional death benefit options:
- The face value, in addition to the value of cash, has accumulated.
- The face value plus premiums you paid. (In this scenario, the cash value will be reverted to the insurer.)
Be sure that your financial advisor is aware of the type of death benefit you’d like, and they will be able to identify the policies that apply to this option.
Variable Life Insurance vs. Variable Universal Life Insurance
Nowadays, “variable life insurance” usually refers to the same thing as it does “variable universal life insurance.” This is because many life insurance companies do not offer “variable life insurance” as they did earlier. They now offer VUL.
Who Is Best for Variable Universal Life Insurance?
The variable universal insurance could be an excellent option for those looking for lifetime coverage and wanting to invest in the life insurance investment.
The variable life insurance option is recommended for those who can afford to take losses if investments don’t go as smoothly as they had hoped or anticipated, like those with a substantial amount of money. Someone at ease with risk and looking to increase their cash value might prefer the variable universal life insurance option instead of total life insurance with fixed growth in cash value.
If you’re considering the purchase of variable universal life insurance, make sure you read the prospectus for the policy and comprehend it in detail, including the policy’s charges, the guaranteed and non-guaranteed cash value projections, and the death benefit. Prospectuses for policy are available for free, as are life insurance quotes.
Tips for Buying Variable Life
Don’t pick an insurance policy based solely on quotes for premiums or forecasted growth in assets, advises Barry Flagg, president and director of life insurance information and research firm Veralytic.
“Regulations in most states for most product types permit agents, brokers or insurers to quote low premiums and/or project high account growth while charging high costs but without disclosing the higher risk of a ‘premium call,’ under performance or even policy lapse,” Flagg states.
If you are a premium customer, you must add more money to your account for cash values to ensure the policy doesn’t expire.
Instead of relying solely on the quoted price or projected increase in cash value, Flagg recommends choosing a policy based on internal costs and the past results of investment funds that underlie the policy. High costs in the internal environment can result in more expensive premiums and a lower value of cash.
Other suggestions for purchasing variable universal life insurance are:
- Get quotes from various insurance companies by contacting an independent financial advisor or Life insurance broker. Quotes for universal life insurance with variable rates policies are typically not accessible on the Internet.
- Review the illustration of the policy, Particularly the parts that are guaranteed. Don’t purchase a policy solely because of projections that aren’t guaranteed but seem appealing.
- Find insurers with minimal internal policy fees.
- Verify the financial strength of an insurance company, for example, AM Best ratings. Because you’re purchasing a long-term contract, you should pick a company that’s likely to remain around for the long run.
- Find a seasoned financial planner or a life insurance professional who can assist you in understanding the product you’re buying.
Here are a few advantages and disadvantages of life insurance with variable terms:
- The potential for higher returns is more significant over other types of insurance.
- The flexibility to alter investment options as time passes.
- Death benefits are 100% guaranteed.
- Investment performance cannot be guaranteed.
- The premiums may exceed those of other kinds, such as life insurance.
- A complex product can be challenging to comprehend.
Here are a few advantages of VUL:
- Possibility of greater return: A VUL policy is an investment component comprising separate accounts like mutual funds. You can invest cash in these accounts, including bonds, stocks, and other investments. The performance of these separate accounts will affect the cash value you can include in your policy. If investments are successful, the value of your cash will increase. However, if investments fail, the value of your cash could decrease.
- Flexibility to alter the investment strategy: You can change your investment options under the VUL-related policy at any point with certain limitations. This allows you to modify your investment strategy when your goals and needs evolve.
- Guaranteed death benefits. The death benefits from the VUL policy are guaranteed even if the cash value decreases. It means your beneficiaries will get the death benefit if you maintain your policy active and pay all the necessary premium payments.
Here are a few potential dangers associated with VUL:
- Investment performance needs to be assured: The investment performance of the different accounts within the VUL policy cannot be guaranteed. This means that the value of your cash may remain the same even if you pay all premium payments.
- The cost of premiums may be higher than other kinds of life insurance. The cost of the VUL policy could be higher than other life insurance, for instance, the term life insurance. This is due to VUL policies providing the possibility to earn higher returns. However, they also come with a higher risk.
- Complex product that may be confusing to comprehend: VUL policies can be confusing and confusing to grasp. This is because they mix life insurance and the investment element. It is essential to review the policy’s terms and conditions before deciding to buy the VUL policy.
If you are thinking about VUL, you must consider your investment objectives and risk tolerance. It is also essential to compare the different policies to choose the best one for you. It is also essential to consult an expert in financial planning to receive individual guidance.
Here are some other things to remember about VUL:
- The costs that are associated with VUL policies are often expensive. These costs can deplete the return on investment and make it harder to create cash value within the policy.
- You may have to pay surrender costs if you end your VUL policy prematurely. The charges could be significant, so it is essential to be aware of them before purchasing an insurance policy.
- VUL policies are an excellent option for those looking to assume greater risk with their investments in exchange for earning greater yields. But they’re not for all. If you’re uncomfortable with the risks, consider a different kind of life insurance.
Where To Buy Variable Universal Life Insurance
Pacific Life earned a top place for life insurance with variable universality in Forbes Advisor’s review of the best insurance firms. Here are a few other top insurance companies selling the variable universal term life insurance
- John Hancock
- Lincoln Financial
- Northwestern Mutual
- Penn Mutual
- Securian Financial