Purchasing life insurance can protect your family and loved ones after your passing, and if you’re considering variable life insurance, you probably have a lot of questions before you make your final decision.
One of the most important things to consider when selecting variable life insurance is understanding the benefits of these plans. Variable life insurance can sound like the answer since it carries the potential for higher returns, but with that potential, there’s a higher risk.
This article can help you understand the benefits of choosing variable life insurance.
What’s Variable Life Insurance?
Before you can understand the benefits of purchasing this type of life insurance, you should have some knowledge of how this type of insurance works.
Variable life insurance is permanent life insurance, meaning as long as you’re paying premiums, the policy will be in force. Like many other types of life insurance, it has a cash value, but unlike others, that cash value is tied to investment accounts like bonds or a money market rather than being in a savings account.
There are some risks attached to this type of life insurance as it’s similar to investing and you aren’t guaranteed a growth rate, the cash value of your plan can actually decrease. Your cash value changes daily depending on the market.
Benefits of Variable Life Insurance
You might be concerned that the risk of variable life insurance doesn’t make it a viable option, but we’re here to tell you why you might be wrong. Here are some of the great benefits that come with having a variable life insurance policy.
Lasts Your Entire Lifetime
One great benefit of variable life insurance is that as long as you continue to pay your premiums, it’ll last your entire lifetime. This type is referred to as a permanent life insurance policy. Other types of life insurance, like term life insurance, will only provide coverage for a set number of years.
When it comes to making those regular payments so you can keep your policy in force, with a variable life insurance policy you’ll have a little flexibility. With these policies, your premium isn’t fixed. With other types of policies like term or whole life insurance, you’ll pay a set amount for as long as your policy is valid.
With variable life insurance, you may adjust your premium depending on your financial needs and investment goals. If you decide you’re only able to pay a portion of your premium, that’s fine, the accumulated cash value will make up the difference. It’s important to understand that while you do have that flexibility, you can greatly diminish your cash value if you constantly depend on that for premiums.
On the flip side, you’re more than able to contribute more than your regular premium. Doing so will increase the cash value as well as the investment holdings of your policy.
In the case of variable life insurance policies, the death benefit is linked to the performance of those funds in which you’re investing. This differs from other types of policies like whole life insurance, where the death benefit is a set amount determined when the policy is first purchased.
The positive performance of your investments means that your beneficiaries would receive more financial protection when the benefit is paid out upon your death. If your invested cash value underperforms your beneficiary could see much less.
Greater Growth Rate Than Other Types Of Life Insurance Policies
With other types of life insurance policies, like whole life, there is a guaranteed rate of growth each year. Variable life insurance policies are different in that there isn’t that guaranteed rate, but there’s the opportunity for a higher rate of growth.
Another aspect of variable life insurance that makes it so attractive to some, is that the growth of your policy is tax-deferred. What this means is that at the end of the year, the annual growth doesn’t need to be reported to the IRS.
Another great aspect is that upon your death, the beneficiary or beneficiaries don’t have have to pay taxes on the death benefit they receive. If the money is withdrawn before your death, there are tax implications.
Variable life insurance can come with some risks, but often if you’re smart about how you invest, the risk will be worth the end reward. With its tax-deferred nature, it can be appealing for some. As with any investment, there is a risk, but as long as you are knowledgeable about your policy, you can come away with a great rate of growth. Be sure to talk to your insurance agent or financial advisor for more information on variable life insurance policies and if they fit in with your financial plan.