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What are the pros and cons of variable life insurance?

Tuesday, December 13th, 2011

Variable Life Insurance is also better known as Variable Appreciable Life Insurance and it offers permanent protection to the beneficiary upon death of the policyholder. This is known as variable type of life insurance as you can allocate a part of the premium dollars into a separate account that comprises of different types of investment funds within the framework of the insurance company’s portfolio like a money market fund, equity fund, or a bond fund etc. Hence, there may be fluctuation in the cash value and the death benefit as it would depend on the way the investment performs.

Most of the Variable Life Insurance policies offer a guarantee on the death benefit and state that it will not go below a stipulated minimum, but there is seldom a guarantee on the minimum cash value. This type of insurance is basically a type of whole life insurance but due to the risks in investment, it also comes under the securities contract where there are regulations under the Federal Securities Laws and is generally sold with a prospectus.

Prior to purchasing any type of insurance, it is important to under the pros and cons that come with it. The pros associated with are that you can participate in different kinds of investment options and you will not be subject to tax on these earnings. But that may not be the case if you surrender your policy. You are also entitled to apply interest that you have earned on your investments on the payment of your premiums and you can thereby potentially lower the amount you pay.

While investing in Variable Life Insurance you assume the associated risks with the investment. When the performance in the investment funds is poor then the funds available to pay the premium is much less. This means that you will have to shell out much more than what you may be able to afford to keep the policy going. If the performance of the fund is poor, then there may be a decline in the available cash or death benefit, but it may not go way below the stipulated levels. The other drawback is that you will not be able to withdraw from the cash value at any point in time.

The bulk of your premium in your Variable Life Insurance policy is invested in one or more of the separate investment accounts. You can choose from a wide range of investment options such as stocks, bonds, mutual funds, fixed income investments, and money market funds etc. the interest that is earned on these accounts increases the cash value on your accounts. The investment objectives as well as the risk tolerance will actually determine the amount of risk you are willing to undertake. You can make the switch between investments in Variable Life Insurance depending on the policy of the insurance company.

Insurers in general engage the services of professional investment managers who help in supervising investments. Hence, you only have to be concerned about the overall asset performance of your investments. This way, you can manage the investment risk but it cannot be eliminated.

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