Variable life insurance is a permanent life insurance policy with an investment component. The policy has a cash value account, which is invested in a number of sub-accounts available in the policy. A sub-account act similar to a mutual fund, except it’s only available within a variable life insurance policy. A typical variable life policy will have several sub-accounts to choose from, with some offering upwards of 50 different options.
Advantages and Disadvantages Variable Universal Life Insurance
One of the advantages of Variable Universal Life (VUL) insurance is that you have the chance to build additional benefits in a tax-deferred separate account in the United States Internal Revenue Code. Other advantages is that the cash value in life insurance is able to earn investment returns without incurring current income tax as long as it meets the definition of life insurance and the policy remains in force. The tax free investment returns could be considered to be used to pay for the costs of insurance inside the policy. The cash values would also be available to fund lifestyle or personally managed investments on a tax free basis in the form of refunds of premiums paid in and policy loans.
The disadvantage of VUL insurance is that the cost of insurance for VULs is generally based on term rates and as the insured ages, the risk of mortality increases, increasing the cost of insurance. If it is not monitored properly the cost of insurance may eventually exceed the cash outlay depleting savings. If it continues in a long term, the savings will be depleted and insured. Then, it will be given an option to increase the cash outlay to cover the higher cost of insurance or cancel the policy leaving them with no savings and either no insurance, or very expensive insurance.
When to Use Variable Life Insurance
You can start to use variable life insurance when you want to make an appropriate subsequent purchase to round out an existing insurance portfolio. Other requirements to be fulfilled before using it are that you have a long-term horizon, you are able to tolerate volatility of investment returns and you are able to pay premiums over an extended period of time. Most people use this insurance because they want to invest their policy values more aggressively. Over all, if you want to start to use this kind of insurance, then you have to be ready with both positive and negative consequences.