What Is Variable Life Insurance?

A form of permanent life insurance, variable coverage offers the flexibility of universal policies with additional opportunities for investment. Also called variable universal life, variable policies allow the insured to change the death benefit as well as the amount and timing of the premium payments. Additionally, policyholders have the ability to invest the cash value of the policy in various funding options that are professionally managed.

Basics of Variable Coverage

The hallmark of this type of insurance coverage is the policyholder’s ability to choose how the cash value is invested. Consumers can invest their cash value in a variety of vehicles, including mutual funds. How the cash value funds are allocated is entirely up to the consumer. In fact, the name “variable life” refers to the policyholder’s ability to invest the plan’s cash value in different accounts with varying values. The values vary according to the performance of the stock and bond markets. The premiums for these policies can be deducted from the cash value of the plan and can vary tremendously. Potentially, premiums can range from no payment in one month to the maximum payment permitted by the IRS in another month depending on the performance of the plan’s investments.

Why Choose this Type of Plan?

Consumers who opt for this coverage usually do so as a supplementary investment vehicle. Most financial experts advise against using it as a primary investment, but it is a relatively safe way to complement more lucrative opportunities.

• Tax benefits. Variable life insurance offers tax-deferred growth of the policyholder’s investments. Especially for consumers in higher tax brackets, this can result in substantial tax savings.
• Retirement planning. These policies usually allow the customer to take out loans against the cash value of the plan tax-free. Customers can then use these loans as a way to supplement retirement income.
• Estate planning. Consumers who want to avoid or reduce the estate tax burden on their heirs can use a plan to set up a trust for tax savings.
• Education funding. Loans against the cash value can help pay for the education of the policyholder’s children.

Risks to Consider

These policies are not without risks. Usually, the premiums are based on term life rates, which means the plan could become unaffordable as the customer ages. Eventually, the money the insured spends on the policy could exceed the savings the coverage provides. Additionally, because the premiums are invested in stocks and bonds, the policyholder assumes a significant risk. If the investments the consumer selects perform poorly, it will affect the death benefit and cash value.