Variable Life Insurance

While universal life offers a separate investment account that earns a competitive interest rate, variable life takes this concept one step further by allowing the policyholders to choose how they want their dollars invested in the cash value account. Variable insurance gives the insured the possibility of higher returns than
attainable with either whole or universal life. However, there is no minimum guaranteed return. Plus, the amount of coverage varies with the results of the investment account. As with the other types of policies, there are multiple forms of variable life insurance: straight variable life and variable universal life.

Straight variable life insurance has a fixed premium, whereas variable universal life has flexible premiums. The policyholder can choose how much of the premium amount goes toward death coverage, just like with universal life. Straight variable life also has a guaranteed minimum death benefit that is established when the contract is originally issued. This aspect doesn’t change the fact that the premium is still invested and that the both the cash value and death benefit vary with the performance of whatever the premium is invested in.

Variable universal life offers the most flexibility of all forms of life insurance. It is also the more popular form of the two types of variable life policies. As with straight variable life, the value of the separate account varies with the investment results of the underlying subaccounts. However, the policyholder can choose between two options for the death benefit. Option A provides for a level death benefit, while Option B specifies that the death benefit be the face amount of the policy plus the cash value at the time of death.

Just as with variable annuities, there are various subaccounts within a variable life policy. The policyholder can choose how the premium is allocated between the different subaccounts so that he or she can try to receive the best possible return on the money, all the while receiving beneficial tax treatment. These subaccounts usually represent each type of asset class; thus, an insured person could opt to split his or her premium between a growth fund, fixed fund, and bond fund, for example. The growth of the cash value of a variable life policy is also tax-deferred. And, as with other types of life insurance, the beneficiary of a variable policy receives the death benefit tax-free.

Variable life insurance policies are becoming increasingly popular as the investing public decides that not only do they need insurance coverage, but that they can still potentially generate some type of profit. Another reason is that, in contrast with whole life and universal life, the cash value doesn’t just earn a specified interest rate. Because the policyholders can choose what type of investments the premium can be invested in, people generally feel that this type of permanent insurance is more beneficial.