Variable Life Insurance- Is It For You?
Variable life insurance is one type of permanent life insurance. It includes both a death benefit and some cash value.
It is intended to provide you with life insurance for your entire life providing you pay the premiums. The premiums for variable life insurance are usually guaranteed and the amount will be divided between the cost of the insurance and adding to the cash value of the policy. Any fees or expenses related to the investment funds will be subtracted before a portion of the premium is allocated to the cash value of your policy. If the investment component performs poorly, you may find that you have to increase the amount of premium you pay in order to maintain the policy.
The death benefit may be guaranteed or it may vary with the fund's performance. Be sure you understand which of these scenarios applies to your policy.
The cash value will vary with the performance of the investment component. This investment is managed for you in a way similar to the arrangement if you were to invest in a mutual fund. The reasons why people choose variable life insurance are usually related to tax issues and the ability to access the cash value. Increases in the cash value of the policy are what is called tax-deferred. You don't have to pay tax as long as the funds remain within the insurance policy. This sounds very appealing when compared to the growth of a regular mutual fund account on which you have to pay tax. Again because of the tax deferral, some people will use this as a way of adding to their retirement funds when they've already contributed the maximum amount to their tax-qualified retirement savings plans. Sometimes the ability to take money out of the cash value of the policy is an important feature in making the decision to select a variable life insurance policy. A caution is in order here. You will only be able to take out some cash value if there is actually cash value in the policy. If the investments have done poorly, there may be no cash value available. There is no guarantee that you will be able to access the cash value. Before making your decision to purchase, it is important to understand clearly what, if anything, is guaranteed with your policy. The pluses of taking out a variable life insurance policy are the tax-deferred status of any increases in cash value, tax-free death benefit, and the possibility of taking out policy loans (if enough cash is available). The downside is the lack guarantees. This is not a type of life insurance for the faint of heart. You or your tax adviser need to carefully consider the risks as compared to the tax advantages. It's also important not to lose sight of the fact that this is a life insurance policy. Be sure that your need for life insurance is not compromised by the uncertainties of the investment market.
| 