Variable life insurance

In life insurance, the word "variable" pops up in sundry contexts: cash value, interest rates, death benefits.  When a life insurance policy itself is called "variable," it means that the investment of the policy's cash value is left  to the policyholder's discretion.

Contents
Types of variable life insurance
Variable vs. non-variable
Investment options and limitations

Types of variable life insurance

Not all life insurance policies have cash value, so not all life insurance can be variable.  Cash value life insurance comes in two varieties (either of which may be variable): whole life insurance or universal life insurance.

Variable universal life insurance makes a better investment vehicle than variable whole life insurance because the latter restricts investment to a fixed payment schedule of fixed premiums.  The former allows payments at any time, in any amount.  However, this freedom increases the risk of negligence, which can lead to policy lapse.

Variable vs. non-variable

In non-variable life insurance, the policyholder has no control over the interest rate his cash value enjoys:

• In traditional whole life insurance, the rate is fixed in the contract.
• In universal life insurance, it is set and changed according to the needs of the insurer.
• In indexed universal life insurance, it is tied inextricably to a particular market index.

With variable life insurance, a policy's cash value accrues interest from the policyholder's decisions on where to invest it.  The policy owner is free throughout the life of the policy to relocate his cash value and to divide it up among his investment options as he will.

Insurers employ asset managers to oversee the cash value of variable insurance policies and carry out the changes instructed by policy owners.  Therefore, owners of variable policies can expect to pay an extra fee to cover the expense of these money managers.  The fee is calculated as a very small percentage of the total cash value being managed.

A downside to variable life insurance is that there is a possibility of a negative return on investment—losing cash value.  This risk is nonexistent in non-variable life insurance.  (Beware: in variable universal life insurance, a negative return on investment exacerbates the risk of lapse.)

Investment options and limitations

Each variable life insurance product stipulates where its cash value may be invested.  It cannot be placed just anywhere.  Why?  In order to legally sell a variable life insurance product, the life insurance company must file its product with the state insurance commissioner, FINRA (Financial Industry Regulatory Authority) and the SEC (Securities Exchange Commission) and specify where its policyholders may invest its cash value.  Thereafter, use of the product is not permitted to deviate from the specification.

To ask a qualified life insurance advisor your questions about variable life insurance or to purchase variable life insurance, call 1-800-823-4852 today.