Definition
Variable life insurance is a type of permanent life insurance policy where the policyholder can allocate a portion of their premium dollars to a separate account comprised of various investment funds. This means the cash value and death benefit can fluctuate based on the performance of the investment options chosen. Thus, the risk and potential rewards are higher than with other types of life insurance policies.
Key Takeaways
- Variable Life Insurance is a type of permanent life insurance that allows policyholders to invest the cash value of their policy into a variety of different investment options, this can potentially increase the policy’s value over time, but also comes with additional risks.
- The death benefit and cash value in a Variable Life Insurance policy can fluctuate based on the performance of the investment options chosen. This may result in higher returns, but there is also a risk that the policyholder could lose some or all of their investment.
- Variable Life Insurance policies usually offer more flexibility than other types of life insurance. Policyholders can often adjust their premiums and death benefits, and may also have the chance to borrow or withdraw money from the policy. However, this flexibility comes with increased complexity, and these policies are typically more expensive than other types of life insurance.
Importance
Variable Life Insurance is a significant financial term as it represents a type of permanent life insurance policy with an investment component. The importance of this term stems from its versatility and potential for high returns.
Variable Life Insurance allows policyholders to invest their premiums in a variety of different investment options, which could potentially increase the overall cash value and death benefit of the policy. It provides a dual advantage for individuals interested in life coverage and investment growth, offering not just lifelong security but also the chance of asset enhancement.
Furthermore, it enables policyholders to have more control over their policies, thereby accommodating varied risk appetites and financial goals. However, this type of insurance comes with investment risks, and the policy’s value can fluctuate based on the performance of the chosen investments.
It’s a critical term for those looking to combine insurance and investment strategies into a single product.
Explanation
Variable life insurance is designed as a permanent life insurance product which not only offers coverage for the policyholder’s entire life, but also includes an investment component, providing a cash value account that can grow over time. The purpose of this type of insurance is to offer the policyholder a higher potential reward compared to other types of life insurance, based upon the performance of the investment account.
Individuals who are financially savvy or have higher risk tolerances might choose variable life insurance to maximize their investment. This insurance product is employed to provide financial security for the policyholder’s beneficiaries, as well as a potential source of funds while they are still alive.
The policyholder can invest in a variety of portfolios depending on their risk tolerance and time horizon, with options usually ranging from aggressive growth stocks to more conservative bond funds. With variable life insurance, the death benefit and cash value vary with the success of the underlying investments, thus, policyholders have the ability to reap potential gains during market upturns, while also facing increased risk during market downturns.
Examples of Variable life Insurance
Example 1: John is a 35-year-old IT professional who is married with two children. He decides to purchase variable life insurance as an investment tool for his future. He chooses this type of insurance because it blends life protection with a savings account. Over time, his insurance policy builds cash value that he can invest in stocks, bonds, and money market accounts, providing his family with comprehensive coverage and the potential for financial growth.
Example 2: Maria, a 60-year-old retiree, decides to take advantage of variable life insurance to help in her estate planning. She uses the policy to potentially increase the cash value of her estate. She also enjoys the flexibility of adjusting her premium and death benefit according to her financial situation and future needs.
Example 3: Smith, a 40-year-old business owner, buys a variable life insurance policy not only to cover his family’s needs in case of his death but also as a means of investing in various sub-accounts offered by the insurance company. This gives him the chance to possibly increase the policy’s cash value over time, which can be a source of supplemental income or even funding his children’s education in future.
FAQs about Variable Life Insurance
What is variable life insurance?
Variable life insurance is a type of permanent life insurance, where the policyholder can control how the policy’s cash value is invested. The policyholder has the freedom to invest in a variety of different investment options, such as stocks or bonds.
Who needs variable life insurance?
Variable life insurance is suitable for individuals seeking both a death benefit protection and an opportunity to invest. It is beneficial for those who are comfortable with investment risks, as the policy’s value can fluctify depending on the performance of investment options chosen.
What are the benefits of variable life insurance?
Variable life insurance offers various benefits. These include a death benefit to the beneficiaries upon the policyholder’s death, a cash value component which can be invested, and potential for significant cash value growth depending on the performance of the investments.
What are the risks of variable life insurance?
The primary risk with variable life insurance concern the investment component. If the investments perform poorly, the cash value and death benefit may decrease. However, many policies provide a guaranteed minimum death benefit.
Can I withdraw money from my variable life insurance policy?
Yes, most variable life insurance policies allow withdrawals and loans from the accumulated cash value. However, these can potentially reduce the death benefit and cash value, and may incur taxes and additional fees.
Related Entrepreneurship Terms
- Premiums
- Cash Value
- Investment Options
- Death Benefit
- Surrender Value
Sources for More Information
- Investopedia: This website provides in-depth articles, definitions, and resources about various topics in finance, including variable life insurance.
- Insurance Information Institute (III): The organization provides a broad array of comprehensive information and insights on insurance topics.
- NerdWallet: This is a personal finance website that provides information about insurance, investing, and other financial topics, including variable life insurance.
- National Association of Insurance Commissioners (NAIC): A U.S. standard-setting and regulatory support organization through which insurance regulators establish standards and best practices.
