Variable Life Insurance 101

May 06, 2018


Also known as variable appreciable life insurance, variable life insurance will not only provide you with lifelong coverage but a cash value account as well. With variable life insurance policies you are guaranteed that you have higher upside potential relative to other permanent life insurance policies.

You need to be aware though that a variable life insurance cover will be more expensive to maintain compared to other cash value life policies.

The Definition of Variable Life Insurance

It is a type of permanent life insurance cover that guarantees coverage for as long as you keep paying the premiums. It has the following three aspects to it:

  • Premium
  • Cash value
  • Death benefit

Every time you make a premium payment, a portion of it goes towards the cost of the inurer’s fees as well as the insurance company. It is this premium that ensures that there is a death benefit. The rest of the premium is directed towards the cash value which shares a similar structure with a brokerage account.

This money (cash value) can then be invested in securities that are similar to mutual funds.

If the invested cash value returns a profit, the proceeds can be used for several things including:

  • Used as collateral for a loan
  • Withdrawn as cash
  • Used to increase the death benefit

Variable Life Insurance’s Cash Value

What differentiates a variable life insurance from indexed universal life insurance or whole life insurance, is how the cash value works.

Each variable life insurance comes with a prospectus that details anywhere from 20 to 30 different options on how your cash value can be invested. Some of the listed options include:

  • A number of equities, for example emerging markets funds
  • Bonds
  • Indices for example, the S &P 500
  • Money market funds

On top of these investment options, variable life insurance usually has a fixed interest investment option provided by the insurer. There are management fees that are associated with every investment option. The fees is not standardized and varies from one investment option to the next. You are likely to pay more if a portfolio manager is choosing which stocks your money is invested in.

The fees that you pay for the cash value investment is also referred to as basis points. A single basis point is equal to 0.01%.

So, if an investment option is indicated to have a 6% rate of return and has 125 basis points, you should expect the profit you make to be less 1.25%.

Variable life insurance policies have a higher upside potential compared to other cash value policies. In addition, even though the cash-value of your policy is deferred you should be aware that it is tax-deferred. This means that you won’t be expected to pay tax on any profit you make so long as the returns remain in the account which in turn makes the cash value to increase at a faster rate.

One important thing you need to note with variable life insurance is that the rate of return might be quite low. It is also not guaranteed.


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