Variable Life Insurance
The variable life insurance can be fitted in the whole life insurance policies, meaning that its availability starts from the moment you purchase the insurance and it ends when you pass away. What differentiates this type of life insurance from other policies is the fact that you are allowed to designate the direct beneficiary of your life insurance, which will have the lifelong benefits of the policy. In addition, the flexibility of the variable life insurance allows you to decide upon the distribution of the funds.
What this means is that while the traditional whole life insurance implies the insurance company will invest your money in fixed-income funds, with the variable life policy you have the possibility to choose from a variety of instruments, such as equity funds, stocks, market funds or bonds, to invest in. It is important to note that the policyholder can choose to invest in a single financial instrument or a combination of them.
The main advantages of the variable life insurance
One of the biggest advantages provided by the variable life insurance is its cash-value component. If you were to purchase a whole life insurance policy, then you will be making monthly payments without ever knowing where the money went. On the other hand, with the variable life policy you will know exactly how much is being invested and how much of the money you pay is spent on the administration of the funds.
Besides the fact that the policyholder will be able to select the tools of his investment, the interest rates and the earning he will make from these investments is not subjected to taxes. Moreover, after you pass away the beneficiaries of your life insurance will not have to pay a dime for the money as well. Nonetheless, if for some reason an individual decides to surrender the policy, then he will need to pay taxes for all the earnings and the interest rates won from the investments.
Since the variable life insurance falls in the category of whole life policies, this means that you are guaranteed for life. What this means in real terms is that you can rest assured that your family members are going to have their financial future secured, regardless of what happens to you. However, in order to make sure that your beneficiaries will benefit from the policy throughout their lifetimes, it is important to make your payments on time.
The disadvantages of variable life insurance
Even though this type of policy can provide a lot of benefits and can generate certain earnings, all that comes with a rather high price. Sure, you can use the earnings you make from your investments to pay for the premium. However, what happens if you made a couple of bad investments? Regardless of how you decide to distribute the money, your cash value can increase or decrease since their worth is also determined by the fluctuation of the market. Therefore, it can happen that you will need to pay more out of you own pocket when your stocks or bonds are performing badly.
At the same time, you should consider your ability to manage your investments properly. If you are clueless about this aspect, then the flexibility of the investments is basically useless for your needs and you would be better off with a whole life insurance policy. Moreover, even though you are allowed to make investments, the truth is that you are limited to the options provided by the insurance policy. Therefore, if you do not have the freedom to make the investments you like, you will consequently not get the returns you want.
The overall value of your variable life insurance policy will be in the end influenced by the investments’ performance on the market. In case the market drops or you will make a few bad decisions, then the cash value of the policy will be severely affected, resulting in lower death benefit. In an extreme case, without knowing how to manage your investments, you can end up in paying your entire life and not having sufficient funds to pay for medical and funeral expenses. However, if you choose the right insurance company, the experts there can help you decide on the type of whole life insurance that can provide you with the most benefits.