Variable Life Insurance, A Hands-on Cash Value Life Insurance Product
Variable life insurance gives the policyholder maximal control over how his or her policy's cash value is invested. Read on to understand what makes it an attractive for people who like to handle their own investments.
What is cash value?
"Cash value" is a tax-advantaged, interest-bearing financial appendage to a life insurance policy. Only cash value life insurance contains cash value, so only cash value life insurance policies can be "variable."
The owner of a cash value policy can take his accumulated cash value at any time by surrendering (terminating) his in-force policy. Alternatively, he can take a loan out from the cash value or make a cash withdrawal (partial surrender) from it.
Interest on cash value
With non-variable cash value life insurance policies, the policy owner has no control over the rate of interest that his cash value enjoys except in deciding which policy to buy. In such policies, the rate of interest is usually either stipulated in the life insurance contract or fluctuable but subject to the discretion of the insurer.
Variable life insurance empowers the policyholder to choose where his cash value is invested and to receive the interest of said investment. Investment options may be any variety of security. The cash value does not need to be kept in a single body but can be divided up among sundry investments. The policy owner may change the location of his investment(s) at any time.
With the power to choose comes the power to lose, however. If the policyholder's investment decisions don't pay off, his cash value could actually decline. This misfortune is not a problem for non-variable policies because their rate of interest is either guaranteed or their cash value invested in options.
Varieties of variable life insurance
There are two types of cash value life insurance, so there are two types of variable life insurance: whole life insurance and universal life insurance. Unless specified otherwise, "variable" insurance usually refers to variable whole life insurance.
Whole life insurance is straightforward: the death benefit is fixed, and the cash value grows at a fixed rate. Variable whole life insurance dispenses with the latter guarantee, thus offering the possibility of greater (or lesser) returns. A certain amount of each premium paid goes into the policy's cash value.
Universal life insurance is generally preferable for the investment-minded because the policy owner can invest as much as he pleases into his cash value and also manipulate the size of his death benefit in order to optimize his cost of insurance. Moreover, universal life insurance is cheaper than whole life insurance.
Limits on investment options
The investment opportunities where a policy's cash value may be held are limited and vary from one life insurance product to the next. Why is this? Federal regulation. Whenever an insurer designs a new variable life insurance policy to sell, it must seek approval from FINRA, and the SEC. A list of possibilities where cash value may be invested must be included in the filing of the product when approval is sought. Later, when the life insurance product is actually sold, it may not deviate from the specifications under which it was filed.
For a look at variable life insurance policies, rates, or further information, call a qualified life insurance advisor at 1-800-823-4852. Want to learn about alternative types of coverage? Check out term life insurance.
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