Many years ago, buying life insurance meant simply purchasing coverage that paid out a death benefit when an insured passed away. Today, however, things have changed a great deal. Life insurance policies are still certainly used as a tool for replacing income or for paying off debt upon the death of an insured. But now, these plans can also be used for so much more.
No longer are life insurance policies just “plain vanilla” anymore. In fact, oftentimes, life insurance policies are used as financial planning tools that can help individuals and families solve all types of additional needs, such as saving for college, paying off a mortgage, and supplementing retirement income.
They can also be used for growing funds based on rising market conditions. One type of policy that can be particularly useful in offering a death benefit while also providing for additional financial needs is variable coverage.
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How Variable Life Insurance Works
Variable life is a type of permanent coverage. This means that it offers both death benefit protection, as well as a cash value or investment component where the policyholder can invest in a variety of “separate” accounts.
These policies are referred to as such because when a policyholder pays their premium into the plan, the portion of his or her premium that goes into the cash – or investment – component of the policy will be subject to the ups and downs of the underlying market fluctuations. Therefore, the plan will be “variable” in its nature.
Typically, the policy holder has the option of choosing from a very wide variety of different investment options within this separate account. These can include mutual funds, stocks, money market funds, bonds, and a number of other financial vehicles. Because some of the investment options that are included in variable policies are securities, these types of life insurance policies are regulated by the federal securities laws.
Just as with the cash value component of other types of life insurance policies, the funds that are in the investment component of a variable insurance plan are allowed to grow on a tax-deferred basis, meaning that the money will not be taxed until the time of withdrawal. This can provide the opportunity for funds to increase at an even greater pace – especially over time and in positive market conditions.
The Advantages of Owning a Variable Life Policy
There are a number of advantages to owning a variable policy. First, as with any other type of coverage, the death benefit proceeds will provide financial protection to the insured's survivors in the event of death. Such funds may be used to pay final expenses, to pay off large debts such as a mortgage, or used as income replacement in paying everyday living expenses going forward.
Another benefit of variable life coverage is that the premiums are typically fixed throughout the life of the policy. This means that, unlike term life insurance, the insured will never need to re-qualify for coverage, provided that the premiums are paid within the grace period and that the coverage stays in-force.
Likewise, the initial amount of the death benefit on a variable policy is also usually a fixed amount – regardless of what occurs in the underlying market. Because of this, the named beneficiary (or beneficiaries) on this type of policy can, therefore, be assured that they will be receiving a certain amount of proceeds upon the death of the insured.
This can be helpful in that if the funds were being counted on for payment of certain debts or the replacement of the insured's income, there would be a set amount coming to the insured's survivors from the variable life plan.
In addition, due to the variety of investment options, variable life can provide insurance policyholders with the opportunity to grow the funds that are in the cash portion of their policy. These funds may be used in the future for other financial needs and they could be accessed via withdrawals or through policy loans.
So, if funds are needed by a variable life policyholder during his or her lifetime, these plans will typically allow the individual to either withdraw or borrow cash from the investment component of the policy. In addition, funds from the cash value component can often be used for paying the policy premiums – alleviating the policyholder from having to do so out of pocket.
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Some Things to Consider Before Purchasing Life Insurance
While there are many advantages of owning a variable life insurance policy, it is also important to consider some key factors prior to moving forward in order to be sure that this type of policy is the best option for you and your specific insurance and investment needs.
First, when considering a variable plan, the policy holder should be able to take on a more active role in the investment of the policy's separate account. Given this, it may be wise to have a good understanding of how mutual funds and other investments work – and how each may, or may not, fit with your particular financial needs and goals.
Being aware that variable coverage comes with a higher level of risk than some other types of permanent life insurance, such as whole life or universal life, can also help to ease any surprises should the market take a sudden downturn.
In any case, an important consideration that any potential owner of a variable policy should have is that he or she will have much more control over how their funds are invested in this type of life insurance plan. This will differ substantially from ownership of a whole life or a universal life insurance policy, where the underlying funds are typically chosen for the policy holder by the insurance carrier.
Is a Variable Policy Right for Everyone?
Unlike whole life insurance, where cash is only guaranteed to grow at a fixed conservative rate of interest, the funds that are inside of a variable life policy are tied to a variety of different market related investment options. This allows the opportunity for a substantial amount of growth. It also, however, can subject the funds to market risk. Therefore, variable policyholders need to be aware that their funds can rise in value. However, they can also fall.
The policyholder of a variable life policy also has a great deal of choices in the underlying investments that are chosen for his or her cash value component. This differs significantly from whole life insurance where the insurance company makes these selections. Therefore, those who are not active investors or who do not have a good understanding of stocks or mutual funds may want to obtain some initial knowledge of these investments prior to moving forward. It is also a good idea to have at least a basic understanding of how different types of market risk can occur, and how such risk may be offset.
How to Get the Best Variable Life Insurance Quotes
When shopping for variable life insurance quotes, it is best to work with a company or an agency that has access to more than just one insurance carrier. This way, you will be able to compare different insurers' policies and benefits objectively in order to determine which fits best with your specific needs. You will also be able to compare different premium quotes in order to see which works best with your life insurance budget.
If you are ready to compare policies and quotes, we can help. We work with the best life insurance companies in the marketplace today, and we can get you all of the important information that you need quickly and easily – right from your home computer, and without the need to meet in person with a life insurance agent. When you're ready to see how a variable life policy may benefit you and your loved ones, fill out the form on this page to start your quotes.
Should you have any questions along the way regarding how variable policies work – about life insurance in general, or about something more specific such as life insurance without medical exams – please feel free to contact us directly. Our experts can walk you through step-by-step the ins and outs of variable policies, and the many ways that these types of plans can be structured.
We understand that the process of buying life insurance can sometimes be confusing – especially when there are many options to choose from. We will ensure that you have all of the information that you need in order to make a well-informed buying decision about the coverage and the plan that's right for you and those you love. Contact us today – we're here to help.