Investing in insurance is a major factor of consideration for most individuals and there multiple varieties of insurance policies to choose from. The variable life insurance is a permanent type of insurance that is supposed to take care of your loved ones in the event of your death, and it is quite different from other insurance products as part of your financial goals.
As opposed to the plan in other insurance products including term life vs whole life, the cash value in the case of variable life insurance is invested in several sub-accounts, which are viewed as mutual funds. The other difference in this case is that for variable life insurance, growth rate is not guaranteed and there is a possibility that your cash value may decrease.
This policy is divided into three parts just like any other insurance policy and these are;
- The death benefit – this is composed of the huge sum of money paid as benefits to your beneficiaries when you die and there are no taxes attached. As a type of permanent life insurance policy, variable life insurance also has two components, which are the cash value and the regular term life insurance policy.
- A beneficiary – this refers to those who will receive the death benefit and the scope goes beyond your spouse and children to cover a trust, organization, or any other beneficiary with whom you have legal relationship.
- Premiums – this refers to how you usually pay for this policy and you choose to pay monthly or annually.
You can get a quote for variable life insurance from insurance companies that offer this product but it is advisable to talk to an independent agent or broker who can advise you based on your financial goals. The reason is because they are in a better position to help you compare life insurance products from various insurance companies and as such, you are in a better position to decide, which policy you need to purchase. Ensure that the agent you approach for advice is licensed, and knows about family budget, emergency funds, retirement planning and so on.
Some of the benefits of investing in variable life insurance include the fact that the policy lasts your entire lifetime and so as you pay your premiums the policy remains active and when you die, benefits are paid to beneficiaries. Also, there are no taxes attached to benefits paid and the rate of growth in this case is much higher than what whole life insurance offers.
There are mixed feelings whether this is a good investment for your financial goals or emergency fund or not and even as you try to consider this, the fact is that there are better investment options, which are cheaper. Many may value this policy because of the fact that there are no taxes attached to benefits but there are alternatives with better solutions as well. The important thing in this case is to separate insurance from investment and savings.
Planning to buy a life insurance plan? Here’s what you need to know about the different types of life insurance:
Term Life Insurance
Term life insurance is the simplest type of life insurance where you buy life coverage for a specific period of time and pay a monthly premium. It only pays if death occurs during that set period, which usually ranges from one year to 30 years.
Term life insurance is the cheapest form of life insurance starting from as low as few hundred dollars a year for $300,000 worth of coverage. Term life insurance, in most of the cases, doesn’t have any investment component linked to it. You are just paying an annual premium to protect your dependents in case anything happens within the policy term.
There two further sub-categories of term life insurance:
Level term – Fixed premiums and death benefits stay the same throughout the term of the policy
Decreasing term – Death benefits decrease each year incrementally throughout the term of the policy
When opting for Term life insurance, choose a term that fits your current financial situation and figure out the number of years you and your family are more financially vulnerable.
Whole Life Insurance
Also known as permanent life insurance, whole life insurance is more expensive than a term insurance policy but has many additional benefits. A whole life insurance policy provides lifelong death coverage even if you die aged 100 and comes with an investment component known as policy cash value. You can also borrow money against the cash value of your policy plan or even surrender the policy for cash.
There are three main types of whole life insurance; traditional whole life, universal whole, variable whole life.
Traditional whole life – This is the most common type of whole life insurance where the premium stays the same throughout the policy’s term and the death benefit is guaranteed. The policy cash value also grows at a guaranteed rate and best of all, you don’t have to pay taxes on the gains while they are accumulating.
Universal whole life – This is a type of permanent insurance policy that provides the most flexibility. It provides the option of increasing death benefit later on in the policy term by passing a medical examination. The insured also has the option to change the policy premiums if enough money has been accumulated in the cash value account. The only downside with universal life insurance is that the returns are not guaranteed since it is tied to a money-market type investment that pays a market return rate – which can be positive or negative.
Variable Life Insurance – This type of permanent life insurance provides the opportunity of combining death benefits with an investment component that comprises of stocks, bonds and money market mutual funds. The risk factor for variable life insurance policy is higher but the returns can be equally rewarding as well. If the investments tank, the death benefit and cash value may decrease, however, some policies guarantee a minimum death benefit.
Variable life insurance policy also comes with great flexibility for the insured in terms of the ability to change and adjust the annual premiums. So if your financial situation changes during the policy’s term, you have the ability to increase or decrease your premium. The policy cash value account can also be used to pay the premiums, if needed. While there are certain added benefits of variable life insurance, one big downside is that the cash value returns are not guaranteed and the risk of investments lie completely on the policyholder.
Whichever type of life insurance you eventually opt for, it is essential to be aware of the risks and rewards and choose a plan that fits your current financial status and future life goals.