What is variable life insurance? Variable life is whole life insurance where the death benefit and cash value of the policy is determined by the performance of the underlying investments of a separate account fund. Most every variable policy guarantees a minimum death benefit.
If you like to play the stock market this might be the whole life insurance choice for you. The potential to make huge gains in the cash value of the policy are virtually limitless. Those cash value gains are tax-free to the beneficiary. The variable policy differs from the whole life policy in four main ways:
- A separate account is set up
- The policy owner accepts and assumes the risk for the performance of the policy
- A minimum guaranteed death benefit is provided based on an assumed rate of interest
- The policy is considered a security which adds significant rules and regulations when sold in United States
In a whole life policy the insurance company places the premium into a general account, which is used to earn income to feed back to the policies as interest. The premiums remain the same for the life of policy or the insured. Below we will lay out the pros and cons of a variable life policy.
Pros:
- Policy cash value can increase substantially, more so than other life policies
- Tax advantages. The cash value of the policy is not taxed until the policy is redeemed
- Not subject to capital gains tax
- Complete control over your investments
Cons:
- The risk is there for your cash value savings to be forfeit with bad investment choices
- Your benefits are wholly dependent on your ability to invest successfully
- Complete control over your investments, you are in charge and need to stay on top of things constantly
- Although your cash value can grow large it might be on a down swing at the time of your death, losing all that built up value