Variable Life Insurance: A Prospectus

A detailed prospectus to everything you need to know about Variable Life Insurance.

Looking for an insurance policy that suits your needs can be a tricky business. 

You must have heard about life insurance policies where there is a savings component and a guaranteed death payout, but, what if you’re looking for investment? What if you want to invest your money for a greater gain or added benefits?

This is where variable life insurance steps in.

Variable Life Insurance Definition

Variable whole life insurance can be described as a type of permanent life insurance policy where there is also a definite investment component. Along with having a guaranteed death benefit and a cash value component, a variable life insurance policy also has an investment account.

How does Variable Life Insurance work?

ou can use portions of your accumulated cash value and invest it in the policy’s subaccount. These earnings are also tax-deferred like any other permanent life insurance policy. A variable life insurance premium is to be paid regularly to keep the policy intact.

It is important to note that there are specific investment funds that you can put your money into, such as bonds, S&P 500 index, equities like emerging market funds and even a money market fund. Sometimes this investment component also allows you to pay all remaining premiums upfront!

Just like any other performing investment, this also comes with a lot of investment risk, loans and poor investment performance may lead to a decrease in cash value, and lose part of your initial investment. But still, an insured usually chooses variable life insurance in order to be in control of their investments and to have a death payout along with lifetime coverage.

To Sell Variable Life Insurance Policies an Agent Must Receive

Three things:

  1. A securities license
  2. A life insurance license
  3. A FINRA (Financial Industry Regulatory Authority) registration 

A variable life insurance agent must be licensed and appointed as a life and variable contract agent to be able to deliver professional services and guidance. It is important for insurance companies to expertly deal with different clients and their needs and design the most suitable policy for them.

It is also important for people to make sure that their agent is licensed and legally allowed to offer insurance services; fraudulent activity is very common and to avoid such scams it is absolutely essential to do a full background check on agents and companies.  

Variable Life Insurance Pros and Cons

Now that we’re somewhat clear on what a variable life insurance is, let’s evaluate the possible pros and cons of the policy. These are somewhat the same as variable universal life insurance policy, as discussed further in this article.

Pros:

  • Variable life insurance death benefit
  • Suitable investment options
  • Growth potential
  • Fixed payment
  • Lifelong coverage

Cons:

  • Greater investment risk
  • Cash value is likely to decrease if investments don’t perform well
  • Cash value is NOT guaranteed
  • Complicated than a whole life or term life insurance policy

Can you cash out a Variable Life Insurance Policy?

Cashing out your variable life insurance policy is possible but only through withdrawals. You are able to withdraw all, or a certain portion of your cash value and usually that is tax-deferred.

However, if your cash value that you’re withdrawing exceeds the total you’ve been paid in premiums, then tax is applicable on that difference. 

Moreover if you’re withdrawing in the initial years of the policy, you may also have to pay a surrender fee that your insurance company may charge you. Usually the time to make that cash value mature is almost 10-15 years and you may not be liable to pay a surrender fee after that. This of course varies from company to company and their policy.

What advantage does an Equity Indexed Life Insurance Policy have over a Variable Life Policy?

This is actually a very common question that most people ask. Luckily we have an answer. But first let’s be clear on what an equity indexed life insurance policy is.

A very complex form of permanent life insurance policy, an indexed life insurance policy is the one where cash accumulation is tied to the stock market index. 

Where a variable life insurance policy allows policyholders to invest portions of their cash value into an investment account, an equity indexed life insurance policy only allows them to invest their money in the equity account. This pays interest according to the market index fluctuation without actually investing the money.

This does sound confusing, because an indexed equity life insurance policy is a little complicated.

Now back to the main question: what advantage does an equity indexed life insurance policy have over a variable life policy?

  1. Cash value can be borrowed against a minimum guaranteed rate of return
  2. Minimum guaranteed fixed interest rate.

There’s your answer, makes sense now, right?

Variable Life Insurance Companies

Here is a list of all the authentic variable life insurance companies that you should choose for your insurance plans.

  1. Variable Annuity Life Insurance Company (VALIC)
  2. Equitable Variable Life Insurance Company
  3. Prudential Variable Life Insurance
  4. Hartford Universal Life Insurance
  5. John Hancock Variable Life Insurance

Variable Universal Life Insurance

Sitting under a larger umbrella of variable life insurance, one major type is variable universal life insurance; a definitive variant of the said policy. 

Let’s go step by step. 

What is Variable Universal Life Insurance?

A variable universal life (VUL) insurance is a kind of permanent life insurance that doesn’t expire and gives the policyholder lifelong protection. Along with having a guaranteed death benefit and a cash value component, a VUL policy ALSO has an investment component.

The policyholder has an option to allocate all of- or part of their cash value in the investment account and also monitor the allocation over time. They are also given a chance to secure and decide their death payout in a VUL policy. But depending upon the market, the cash value of a variable life insurance policy can fluctuate up and down.

Variable Universal Life Insurance Pros and Cons

When people have a chance to manage their investment component according to their needs and decide when to allocate what amount of money, this freedom makes them opt for a VUL insurance. 

For every person the reason for signing in on the policy may be different, and a definitive list of pros and cons will determine whether the policy works for you or not.

Pros:

  • Lifelong protection
  • The freedom to be in control of your investment decisions
  • Death benefit will NOT decrease as long as minimum variable life insurance premiums are all paid
  • Tax-deferred earning
  • Flexible premium life insurance
  • Potential of growth

Cons:

  • Poor investment performance will lead to significant decrease in cash value
  • More expensive than variable life insurance   
  • May charge very high surrender fee
  • Death benefit will decrease if minimum amount of premiums are not paid promptly

What is Group Variable Universal Life Insurance?

A Group Variable Universal Life (GVUL) is a combination of two major parts: protection and savings! The premiums you pay cover the cost of your life insurance plan!

This plan is liable to employees of an organization where they are offered insurance. It is relatively cheaper for organizations to opt for collective plans for their employees. Employees name their beneficiaries at the start of the plan who receive the death payout when they die, provided all premiums were paid on time and the policy is still in force.

Your beneficiaries receive lifetime protection in this life insurance policy and the investment component can serve as savings for you. So basically, in one policy you get to protect the future of your children through the death benefit AND use the savings to cover expenses during your life.

The maximum age for qualifying for a GVUL policy is the age of 75. In some individual cases, you may not even be asked to give a medical exam.

Variable Universal Life Insurance Calculator

If you’re looking to opt a VUL policy, it is important to have at least an idea of what your quotes will look like. With that said, you don’t need to go to an insurance company for rates- YET.

You can easily find an estimate of quotes online.

This table shows sample rates of what a monthly premium for a healthy male and female would look like. Assuming they’re looking for a lifelong variable universal life insurance policy coverage of $250,000. 

Age Male Female
25 – 35 $100 – $140 $78 – $120
35 – 45 $140 – $221 $120 – $201
45 – 55 $221 – $364 $201 – $340
55 – 65 $364 – $659 $340 – $571

Note: Sample quotes have been extracted online, courtesy of SmartAsset. Actual rates of premiums are most likely to differ based on the health of the individual and nature of the policy.

Variable Annuity Life Insurance

The purpose of a variable annuity life insurance policy is to make sure you never outlive your income!

Wait, is that even possible?

When you put your money in a mutual fund, it is expected to grow and the gains are tax-free, well that’s until you decide to withdraw your cash value. The good thing is that the value of gains can grow at a very steady rate and can outgrow the initial level of investment. When a person retires, they still have some levels of monthly income paid to them as decided at the start of the policy.

The Variable Annuity Life Insurance Company (VALIC) is famous for specializing especially in variable annuity life insurance, retirement plans and tax-deferred investment plans.

Pros and Cons of Variable Annuity Life Insurance

Pros:

  • Tax-deferred
  • Gives you a chance to select investment options
  • Exchange option is available between subaccounts
  • Lifetime income 
  • No additional cost
  • Spouse and beneficiary protection

Cons:

  • Poor investment performance will decline the value of annuity
  • Policy surrendering may cost you additional money
  • Relatively higher fees than that of mutual funds

Variable Life Insurance vs Whole Life

Whole life insurance is a permanent life insurance policy where there is guaranteed death payout as well as an accumulated cash value that tends to grow over time. 

Both variable life insurance and whole life insurance are permanent policies that offer lifelong coverage to policyholders. The only difference between the two is that variable life insurance also offers an investment component which gives policyholders the opportunity to stay in control of their investments. The insurance coverage in a variable life insurance policy may vary based on the value of your investments and the market.

Both have a guaranteed death payout which does NOT decrease just as long as the minimum amount of premiums is regularly paid. 

If you’re only interested in having a guaranteed death benefit that your beneficiaries can use if you die or if you’re only looking for using the cash value for greater expenses in the near future, you should go for a whole life insurance.

A variable life insurance policy will allow you to reinvest your money into the subaccount, or mutual funds or even to get ahead of paying premiums! This is only suitable for people looking to invest, and people who can bear the risk of fluctuating markets.

Variable Appreciable Life Insurance

This is a form of whole life insurance that comes with the option of investing your money in mutual funds. Of course, there are many risks to this policy including the payout decreasing due to market fluctuation.

However, this policy may suit people who are looking to invest portions of their variable life insurance cash value into mutual funds. 

Variable Second To Die Life Insurance

Variable second-to-die life insurance, also known as variable survivorship life insurance is the joint insurance policy that covers two people- usually husband and wife.

The death benefit is transferred to beneficiaries only when both insured people die, if one dies, there is no payout. And until both beneficiaries die, premiums have to be paid. If one policyholder dies, their spouse will have to continue paying premiums. 

The biggest advantage of this type of policy is that it is cheaper to insure two people under one policy rather than insuring them separately. This policy also allows policyholders to put their money in a separate account to pay off premiums, and its performance is solely based on how the market operates. 

The Path Forward

Opting for an insurance policy has become a need these days, having to secure financial conditions for the near future and money to reinvest for the good of your family. Many people think on this path now where they aim for zero financial tension for themselves and their family decades down the road.

Many people choose variable life insurance policy because of the investment component and the freedom to be in control of your money. 

The cash is then used through withdrawals that people may need to pay off huge amounts during their life, or to pay off premiums. Of course, the market plays a vital role when it comes to investments because poor performance leads to a decrease in cash value and death benefit.

It is important to have a trusted advisor who can guide you on the different policies and suggests which one suits you best. 

Nabeel Ahmad

Nabeel Ahmad

Nabeel Ahmad is the founder and editor-in-chief of Insurance Noon. Apart from Insurance Noon, he is a serial entrepreneur, and has founded multiple successful companies in different industries.

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