Variable life insurance serves as a permanent life insurance policy and a securities instrument. Financial professionals who offer variable life insurance products must be broker-dealers because of this securities aspect.
Variable insurance offers a death benefit and cash value; the cash value is dependent on the performance of investment accounts. The insurance premiums are also fixed, meaning the price of the policy remains the same throughout the life of the policy.
How Variable Insurance Works
Variable life insurance policies are a form of permanent whole life insurance that pay out a face-amount death benefit, as with most traditional permanent insurance.
But unlike a traditional whole policy, a variable life insurance policy’s cash value is not guaranteed. Traditional whole life insurance policies have a guaranteed minimum interest rate of cash value, whereas the insurer assumes all the investment risk of the premiums placed in their general accounts. With variable insurance, you as the policyholder own the sub-accounts, rather than the insurer; therefore, the insurer cannot guarantee cash value.
life insurance policy premium payments are placed into separate investment sub-accounts similar to mutual funds. You can choose which investment options are good for you since you retain ownership. The cash value of the policy fluctuates with the investment performance of your sub-accounts due to market conditions. The only thing variable life insurance cash value has in common with a traditional permanent insurance policy’s cash value is that the cash value growth is tax-free.
Flexible Premiums in this Life Insurance
life insurance premiums stay the same as long as the policy is in force. Premiums become flexible with life insurance when it is combined with components of a universal life policy. This is called a variable universal life policy (VUL). VULs have characteristics of variable insurance (sub-accounts) and universal (flexible premiums).
Variable Universal Insurance
Variable universal insurance (VUL) integrates features of a universal life insurance policy and a insurance policy (VLI).
A universal life insurance policy is a type of permanent life insurance where the cost of insurance and the death benefit can be increased or decreased. A universal life policy uses cash value to cover the costs of the policy. This is great to secure yourself from policy termination. However, the cash value must be funded enough to cover the cost of the policy, or it may lapse.