What Is Variable Life Insurance?
A variable life insurance policy is a type of permanent life insurance. A permanent life insurance policy covers a policyholder for the entirety of their life so long as premiums are paid. This type of policy is perfect for people who are looking for cash value, investment variety, flexible premiums, and a flexible death benefit.
When you pay the premium on your variable life insurance policy, a portion goes to the insurance company to cover fees to keep death benefits in place. The other portion of your premium is paid towards your policy’s cash value and can be used to invest in certain securities that resemble mutual funds.
Variable Life Insurance Pros
One of the best things about variable life insurance policies is that your premiums are adjustable. You can elect to skip payments or stop paying altogether if the cash value of your policy can cover the costs of your premium. This is especially helpful if you find yourself in a financial emergency, for example.
With the flexibility of variable life insurance on payment premiums, you can choose to:
- Pay more than your premium: You can build up your investment gains much faster overfunding your policy’s cash value early on.
- Pay a portion of your premiums: You can elect to pay only a portion of your premium and have your cash value pay the other portion.
- Not pay your premiums: If the cash value of your policy is large enough, you can elect to have it cover your premium payments entirely.
How a variable life insurance’s cash value is structured makes it different from a whole or an indexed life insurance. Each variable life insurance policy comes with a list of twenty to thirty options on where to invest your cash value of your policy. These options are tied to financial markets and the fluctuations these markets can go through can affect the value of your policy. Bear in mind that while the return on investment can be great, you are also taking a risk that your cash value might be reduced and if you are using your policy’s cash value to pay the premiums on your variable life insurance policy, you might find yourself in a lapsed policy and run the risk of losing your death benefits. On the upside, you can safeguard yourself by transferring funds between investments. Doing this is tax-free so you’re free to do this without the constraints of taxes.
Another upside to variable life insurance policies is that you can increase or decrease your policy coverage based on your needs. As such, you may also be able to request to increase your death benefits or increase your policy’s cash value by making a lump sum.
Variable life insurance death benefits are structured in one of two ways: level death benefit or face amount plus cash value. A level death benefit is equal to the face value of your policy at the time of your purchase. Face amount plus cash value death benefits refer to a policy that will cost more but your beneficiaries will receive your cash value in addition to the policy’s face value.
Other variable life insurance policies offer other types of death benefits such as equaling the policy’s face value plus all premiums paid, butlevel death benefits and face amount plus cash value are the most common.
Variable Life Insurance Cons
One of the key downsides to variable life insurance policies are the fees associated with it. All permanent life insurance policies come with fees but, by and large, variable life insurance policies tend to have the highest fees. The following are some of the fees you might expect to find in your variable life insurance policy:
- Surrender charges: This refers to a period in which if you withdraw your cash value or give up your policy, you will have to pay fees.
- Withdrawal fees: This is typically a smaller fee but you may get charged a withdrawal fee every time you take money out of your policy’s cash value.
- Investment management fees: These costs can vary depending on how you choose to invest your policy’s cash value
- Sales and admin fees: This fee covers the agent’s commission and the cost to keep up your policy.
- Mortality and expense risk charges: These fees are paid to provide the actual death benefit.
- Policy loan interest: If you use use your life insurance’s cash value as collateral when taking out a policy loan, the insurance company will charge interest on your loan
- Riders: If you have riders or additional coverage attached to your policy, you could pay additional fees for these as well.
Typically, the administrative fees attached to variable life insurance policies are higher because policies are SEC regulated investments. These costs are passed on to you by the insurance company and should be considered when you are deciding how to invest your policy’s cash value.
Selling Your Variable Life Insurance Policy
Because variable life insurance fees are higher than most other insurance policies, policyholders might have a hard time in keeping up premium payments. Similarly, if policyholders find themselves in a financial emergency, they may need to have the money available in a lump sum and cannot wait until death benefits are paid.
If you find yourself in this situation, it might be a good option to consider a life settlement. Life settlements refer to the sale of a life insurance policy by a policyholder to a third party in exchange for a lump sum of money. The money received from a life settlement can be used to cover medical expenses or any such life emergency.If you need assistance in selling your variable life insurance, contact Harbor Life Settlement today.