Variable Life Insurance: The Product Of Choice When Using Cash Value Life Insurance For Investment Purposes

Cash value life insurance explained

Cash value life insurance products are life insurance policies which include "cash value, " an highly-liquid, interest-bearing financial account which can be accessed for cash. Cash value makes life insurance useful even when the insured lives past an age when coverage is needed: the policy can be surrendered and its accumulated cash value used to fund a retirement (or whatever purpose the policyholder pleases). (There are also methods of accessing cash value without surrendering the policy.)

When selling life insurance, it is illegal to represent a cash value life insurance policy as an "investment." While that is not to the salesperson's advantage, it is probably to the advantage of the cash value life insurance products themselves because if the government classified them as investments, then they would not enjoy the tax advantages which they do.

Variable Life Insurance for beginners

Whereas a cash value life insurance policy itself may not qualify as an investment, its cash value, at least, can be invested. Variable life insurance gives that prerogative to the policyholder. For non-variable policies, the interest rate is either set by the insurer or bound to a particular market index.

Each Variable Life Insurance product specifies where its cash value may be invested (government regulation requires it), but the policyholder is free to distribute his cash value among any of the available securities and to redistribute said cash value at will.

Because of the extra administration cost inherent in investing cash value accounts on an individual basis and in carrying out a client's investment instructions, Variable Life Insurance policies carry an asset-management fee, a small percentage of the cash value being handled.

Types of variable life insurance

There are two types of variable life insurance: variable whole life insurance and variable universal life insurance. Customers who are drawn to variable life insurance because of the potential return on investment will probably favor variable universal life insurance because it permits the policyholder to invest any amount he chooses, with whatever regularity he chooses. Contrariwise, the benefit of variable whole life insurance's fixed premiums is that the policyholder is less likely to let his policy lapse through non-payment.

How is lapse a concern for universal life insurance policyholders? Instead of requiring definite premiums for universal policies, insurance companies make periodic charges against universal life insurance policies' cash value accounts. If the cash value depletes, the policy lapses. Variable universal life insurance opens the possibility of a negative return on investment, which exacerbates the risk of cash value depletion.

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