Your Comprehensive Variable Life Insurance Guide
Variable life insurance is a life insurance policy in which the primary distinction is that the policy is market-driven. This type of insurance will often provide a minimum death benefit but the actual cash value or death benefit of the account is determined by the performance of the underlying portfolio investments. Variable life insurance provides the investor the benefits of an insurance policy and still provides them the flexibility to grow their account in the markets. This tends to make this type of insurance more directed at the risk-taking group of investors.
Variable life insurance was originally introduced into the market in 1976. After many years of negotiation, it was finally approved by the Securities and Exchanges Commission (SEC). Because this type of insurance is a market investment driven, it is regulated by both state insurance departments and the SEC. Life insurance agents need to be licensed to not only sell insurance products, but also licensed to sell securities.Variations of Variable Life Insurance
There are a number of variations to traditional variable life insurance policies, most of which are simply small changes to how the policy functions. Variations in death benefit calculations and premium payments account for most of the differences.
Types of Variable Life Insurance:
- Variable Adjustable Life Insurance – This is a policy that can be adjusted to change the death benefit level up and down. The policy owner is also able to increase or decrease the premium payments paid to the account, thereby changing the length of the payment period into the life insurance policy.
- Variable Universal Life Insurance – A variable universal life insurance policy is a variation of whole life insurance. This type of insurance incorporates all of the policy adjustment features of universal life insurance and also adds in the variable life insurance investment capabilities of the policy-owner. Because of the nature of the universal variable life insurance policy, the connection between portfolio performance above or below some predetermined level and the formula driven adjustment of corresponding death benefit is eliminated. The death benefit is designed after other universal life plans.
- Variable Whole Life Insurance – Variable whole life insurance is the typical variation of variable insurance, and provides lifetime death benefit coverage to the policy-owner assuming the account remains sufficiently funded.
- Flexible Premium Variable Life Insurance – This type of insurance allows for the premium payments to be adjusted to fit the needs of the policy-owner. Adjustments will affect how the insurance policy is funded and can influence the cash value of the account.
Variable Life Insurance Pros and Cons
The advantage of variable life insurance comes most directly to risk tolerant investors. This policy allows them to invest in a "safe" insurance vehicle, and at the same time take some risks with the growth of their portfolio. We are not saying that variable life insurance should be considered a safe investment, but that insurance in general is considered a safer place to hold your assets. Because of the ability to tie your account value to market growth, variable life insurance can allow the policy-holder's money to work harder for them.
Another advantage that most of these policies have is that the insurance company provides a minimum guaranteed death benefit. Because the investment risk is on the policy-holder, the insurance company has provided a way to protect the owner from unfavorable investment returns.
And while the guaranteed death benefit if an advantage of these accounts (not compared to other insurance types but to itself), the ability for the cash value and death benefit to decrease is one of the primary disadvantages of variable life insurance. For many people, being able to control the investments of your insurance policy is not an appealing feature. You have to concern yourself with how the funds are invested. Your future death benefit is tied to the performance of your portfolio. This volatility is enough to dissuade many people from utilizing this type of account.
Investors should also note that while you can still take out loans from your account, it may be a smaller percentage of total cash value than a typical whole life insurance policy provides. If you need whole life insurance explained further, please see our article on the subject.
Variable Life Insurance Tax Treatment
For the most part variable life insurance is taxed the same as other whole life insurance policies. Where you have to exercise more caution is if you are taking or depleting your account in first couple of years of the account's existence.
As with other insurance types, the Tax Code presents modified endowment contract provisions that affect the variable life insurance contract. Your contract needs to meet the seven-pay test (paying the cash value up over at least a seven year period). If you contract fails the seven pay test, you can face steep tax implications from distributions and the growth of the account.
The other thing that you should watch out for with variable life insurance policies is whether you are forced to take a distribution of the cash value to retain the life insurance status under the Code. These distributions can be considered taxable income and are most heavily taxed in the early years of the account. Before you take distributions from a variable insurance policy be sure to consult with your tax consultant.
How To Get A Variable Life Insurance Quote
Finding a variable life insurance company should not be very difficult, and from there, finding a quote that meets your specific needs should only be a matter of plugging in the numbers and getting the agent to do the work.
As with any other insurance contract, you want to get a number of variable life insurance quotes before you commit to any one policy. When you use an insurance broker to find your policy, you allow yourself the option of choosing between a number of different policies and insurance companies. Make sure that you take out a policy with a reputable company. You want to find a company with a proven track record, years in the industry, and high levels of customer service.
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