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Interested in investing the cash value earned from your life insurance policy’s cash value? Find out if variable life insurance is the right choice for you.
Updated October 26, 2020|4 min read
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Variable life insurance is cash value life insurance that stays active your entire life, making it much costlier than a traditional term life insurance policy. The cash value component allows for the policy to be utilized as an investment component, but this doesn’t necessarily make it a good life insurance choice for most people since your investment options are highly limited. It’s generally only recommended for people who have maxed out all other investment options.
As a type of permanent life insurance, you pay your monthly or annual premiums for your whole life. Similarly to other types of life insurance, like whole life insurance, it pays a tax-free lump sum to your beneficiaries if you die. But more often than not, it is purchased due to its cash value and utilized as an investment component.
Variable life insurance pays a lump sum to your beneficiaries when you die, called a “death benefit.” The bigger the death benefit, the more expensive the policy premiums. While whole life offers a guaranteed minimum death benefit, variable life does not.
Monthly or annual premiums are required to keep the policy in force. You’ll need to pay them your entire life to keep your variable life insurance policy active.
Each month, a certain portion of your premium will go into a tax-deferred savings account, called the cash value of the policy. (The exact amount that goes into savings is determined by your individual policy.) The policy's cash value grows over time.
You’ll have the opportunity to invest the cash value in various funds offered by the insurance company. Investment performance will reflect broader market trends. You may earn more interest than you would with a whole life insurance policy, which gives you a fixed interest rate, but you’ll be exposed to investment risk as with any market investment if the fund underperforms.
Variable life insurance is basically whole life insurance with added flexibility around how the policy’s cash value grows over time. Check out the graph below for a snapshot of variable life insurance vs. whole life insurance.
|THE DETAILS||VARIABLE LIFE INSURANCE||WHOLE LIFE INSURANCE|
|Guaranteed Death Benefit||Yes||Yes|
|Guaranteed Cash Value||No||Yes|
|How Cash Grows (or Shrinks)||Subaccounts - pool of investor funds offered by insurer||Earns interest at a predetermined rate|
|Notes||Risk of holding expensive insurance policy with little to no cash value||No risk compared to other permanent types, but there are probably better investment products|
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Due to its high cost, variable life insurance isn’t the right life insurance or investment option for most people. If you’re simply looking to ensure a death benefit payout for your family, a traditional term life insurance policy offers more coverage at a lower price. Meanwhile, most people will see higher rewards in traditional investments. But for individuals who have exhausted all other investment options, the cash value of a variable life insurance policy can prove useful.
There are both pros and cons to getting variable life insurance. While for most, the cons will outweigh the pros, there are certain circumstances where variable life insurance makes sense.
It protects your family from debts like mortgage and student loans in the event of your untimely death
It covers final expenses, like funeral and other end-of-life costs
It establishes long-term savings, with the ability to invest in insurer-provided funds
It is much more expensive than term life insurance for the same level of protection for your beneficiaries
It has limited investment options for the cash value you’ll build
There is a risk of policy lapse if you can’t keep up with expensive premium payments, which would leave you facing surrender charges
Because variable life insurance is more suitable as an investment rather than just life insurance, you’ll need to contact a life insurance broker that has an investment license to purchase the policy. You’ll likely need to go through the typical underwriting process and prove your evidence of insurability to get variable life insurance coverage.
Policygenius offers traditional term life insurance coverage, which is better suited to protect your family’s financial health, through some of the top life insurance companies on the market.
Whole life insurance: A basic form of permanent life insurance. Whole life insurance offers insurance coverage to beneficiaries that gradually reduces the insurer’s commitment as the policyholder’s cash value builds. The cash value earns interest at a fixed rate predetermined by the insurer.
Universal life insurance: Similar to whole life insurance, except it offers the policyholder flexible premiums that allow buyers to use the cash value to pay for premiums. The interest that the cash value earns is also subject to change with universal life, whereas it’s fixed with whole life.
Variable universal life insurance: Variable universal life insurance (VUL) is similar to universal life insurance in that it has fluctuating premiums, but differs in its asset options. With a variable universal life insurance policy, you can choose the assets your premiums invest in.
Final expense insurance: A type of permanent life insurance usually used by seniors, final expense insurance is meant to cover any end-of-life costs and outstanding debts. Policies are typically sold for smaller coverage amounts—$2,000 or $40,000 for policies offered by Policygenius in October 2020.
Guaranteed life insurance: Permanent life insurance for seniors or those who may not qualify for other kinds of life insurance. Policies are sold for smaller amounts of coverage — typically a maximum of $25,000 for policies offered by Policygenius as of October 2020 — and nearly all applicants are accepted. Premiums are expensive relative to the amount of coverage.
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For the majority of people, variable life insurance is neither a good life insurance product nor a good investment vehicle.
There are much better ways to invest than in a variable life insurance policy – ways that are cheaper, have a higher growth potential, and aren’t wrapped up in a complicated life insurance policy. Many shoppers prefer to avoid permanent insurance policies altogether and instead opt to buy a term life policy and invest the rest of their savings in a retirement account such as an IRA or 401(k).
There is a small minority that may find variable life insurance useful due to its tax-deferred nature, but even in those cases, there are alternatives that may provide a better solution.
For the majority who won’t find variable life insurance useful, a much simpler and cheaper term life insurance policy is the way to go. In general, people should avoid combining insurance with an investment or savings component. If you’re trying to put together a long-term financial strategy that includes a variety of investments, you should speak to a financial professional or tax expert.