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Variable Life Insurance

By Jim Sloan on April 20th, 2010

Variable life insurance is a permanent life insurance policy that allows the policyholder to invest part of the policy's cash value, the investment portion of the policy, in stocks and securities, which means there is some risk involved. If your investments do poorly, you could end up with a smaller insurance benefit than you would have with a standard whole life insurance policy. On the other hand, if you invest wisely, your returns--and ultimate the death benefit--could be far greater than a traditional life insurance policy.

This type of permanent life insurance policy is best suited for individuals looking for a long-term investment and who are comfortable making investment decisions. A variable life insurance policy is typically a very complex product--it is sold by prospectus and regulated by the U.S. Securities Exchange Commission--so it pays to understand it thoroughly before investing. Be sure to ask questions about anything you don't understand.

Some Advantages of Variable Life Insurance

  • Earnings on the invested money accumulate tax-deferred, a key benefit
  • You control how the net premiums are invested in stocks, bonds and short-term money-market funds
  • You can choose between policies with fixed premiums or flexible premiums that allow you to change the duration and the amount you pay
  • There may be a guaranteed death benefit, but you may have to pay extra for it

Some of the Disadvantages

  • If your investments perform poorly, you could end up with a smaller cash value than you would have received through a whole life insurance policy
  • There are no guarantees on how your investments may perform, and the risk is all yours
  • The first year's premium is eaten up by initial administrative costs and commissions, so even if your investments do well, it could be years for cash values to build up
  • These are long-term investments, which means you have to pay substantial taxes and insurance company charges to withdraw it early
  • Variable life insurance requires that you actively monitor and participate in your investments, making it good for those comfortable working in that arena but potentially challenging for Wall Street neophytes

Another type of policy--variable universal life insurance--combines some of the features of universal life insurance with the investment freedom and potential risk of variable life insurance. There is no guarantee of earnings or cash values, and these policies must also comply with SEC regulations. Again, be sure to study the prospectus closely.

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