Variable Life Insurance
For consumers looking to purchase a life insurance policy that also features investment opportunities, consider variable life insurance. This form of permanent life insurance allows consumers more control over their investments and financial future than traditional life insurance policies do.Much like whole life insurance, a variable life insurance policy is for consumers who are ready to make a long-term life insurance investment. Variable life insurance policies do not expire after a set number of years as they do with term life (temporary) insurance policies. This form of insurance also allows consumers to receive a cash payout if they decide to cancel the policy. Of course, insurance providers have their own specific rules and regulations regarding early termination outlined in the policy prospectus. Early termination of a policy also has federal tax penalties as well.
For consumers who wish to purchase variable life insurance, it is essential that they carefully read and understand the details of the prospectus. Everything relating to your life insurance policy is in this document and is overseen and regulated by both the Securities and Exchange Commission as well as the specific state's Insurance Commissioner.
Benefits
Consumers who choose to purchase a variable life insurance policy receive a variety of benefits. Most importantly, variable life insurance policyholders have the benefit of being able to choose exactly how to invest a portion of their premium. Each variable life insurance policy allocates a financial percentage towards the payment of the premium, and a portion to the investment portion of the policy. Policyholders have control over the investment portion of the policy and can choose to invest in stocks, bonds, mutual funds, etc.
Variable life insurance policies also allow policyholders to change how the investment portion of the policy depending on the market. For example, if a policyholder decides to invest a majority of the available funds into a particular stock, they can quickly rearrange the allocated funds if the stock price begins to fall. However, it is vital that policyholders understand that many insurance companies limit the number of times they can change how the investment portion of the policy in a given year.
Another important benefit or variable life insurance policies are the tax incentives. For example, when a beneficiary must cash in the policy due to the death of the policyholder, they do not typically pay federal taxes. In addition, when your policy grows due to wise investments, you receive the benefit of deferred taxes. Finally, if a policyholder decides to change how to allocate their investment portion, they do not incur capital gain taxes.
Risks
Due to the investment portion of a variable life insurance policy, there are certain risks involved with this form of life insurance. For example, if a policyholder decides to invest a majority of their allocated funds into a stock that underperforms their policy in turn decreases. This level of risk is similar to any investment portfolio and can change with time. However, most variable life insurance policies have a guaranteed death benefit minimum written into the policy prospectus.
Minimums
If the investment portion of your policy drastically decreases the amount of your insurance policy, there are still funds available in the event of the death of the policyholder. This is because variable life insurance policies have set financial minimums guaranteed within the policy. This is another example where it is essential that policyholders review their prospectus to determine the amount as well as any penalties associated with the guaranteed death benefit.
Flexibility
Another benefit of choosing a variable life insurance policy is the financial flexibility. For those consumers who are financially aware and understand the risks involved in investing, this form of life insurance is a perfect fit. If the investment portion of the policy performs better than expected, policyholders not only see an increase in their available funds, but also have the option of decreasing their annual premium.