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What is Variable Life?

In this segment

• Looking at variable life insurance

In this chapter, I’ll discuss an interesting variation on universal life.

Variable Life

A variation on whole and universal life insurance is a variable life insurance policy. Under the terms of this form of insurance, you maintain a cash value from which your term insurance premiums are paid. What makes this type of policy different is that the cash value is invested in mutual funds. And the amount of your death benefit is tied to the mutual fund’s performance.

Variable life investments

Typically, you have the choice of investing your cash value in a common stock mutual fund, a bond fund, a money market fund, or any combination of funds. You maintain the control at all times. With some variable life insurance policies, you can change funds, but you’re always investing in the company’s funds. The success of these funds depends on how successful insurance company’s investment managers are.

Variable life death benefits

The amount of your death benefit with a variable life policy varies but is typically never below the face value. If your investments go up, so does your death benefit. If it decreases – well, so does your death benefit. In fact, that’s one of the biggest dangers in this kind of policy.

If your investments go down, so, too, does your death benefit! And remember, you’re buying life insurance and not as an investment but to protect your survivors if you die. Consequently, some insurance professionals are wary of this type of insurance.

However, a variable life policy with a minimum guaranteed death benefit is a whole different story, at least as far as protection goes. With a guaranteed death benefit, variable life can be excellent insurance policies because if the investments are successful, the cash value can go up much more than a policy with a fixed rate of return.

Straight versus universal variable life

You can get two different kinds of variable life policies: a straight variable policy, in which your premium is fixed and the death benefit rises and falls as the investments go up and down, and a variable universal policy, in which the premiums vary, the death benefit is either fixed or increases (just like any normal universal life policy), and your cash value goes up and down with your investments.

With straight variable, if the value of your investment exceeds a specified minimum (usually around 4%); the death benefit goes up by that amount. If your investment’s value decreases, so does your death benefit. And with most policies, your death benefit will never decrease below the original face value.

If you’re considering purchasing a straight variable life insurance policy, make certain it has a guaranteed death benefit.

Other terms of variable life

Most of the other terms of variable life policies are the same as a universal life policy:

• You can borrow against your cash value.

In many policies, the amount you borrow is limited by the amount that’s invested in a money market fund, which often gets a lower rate of return than the stock or bond funds. In my opinion, this sort of defeats the purpose of buying this kind of policy to take advantage of the more dramatic rises in the stock market.

• You can choose to have an increasing or fixed death benefit.
• Your cash value earnings are all tax-deferred which adds value for many people.

The bottom line on variable life

For many people, variable life is an excellent product because it combines flexibility and bigger returns. But it also adds in considerably higher costs. The premiums are much higher than universal life, in part because the expense charges are much higher. Remember, your investments are paying not only for the cost of your term life insurance but also for the cost of the company’s investment managers.

The purpose of life insurance is to protect your survivors. Although you want to choose the right kind of policy for your needs, you’re not insuring yourself to make a killing on the stock market. So make sure that any policy you buy, especially a variable life policy, has a guaranteed death benefit. If you’re looking for a good return on your money and want to invest, particularly in a tax-deferred vehicle, you’re probably better off doing so through an IRA or 401(k).

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