Variable Life Insurance Pros and Cons

Let's start with the basics. Life insurance policies are of two kinds. There are the whole life insurance policies and the term life insurance policies. The former is usually for the rest of your life, while the latter is for a fixed term, which may be five years or ten years or more. For both kinds of life insurance policies, you have to pay premium regularly, as stipulated by the insurance company. It can be once a month or once a quarter or yearly. In case of a whole life insurance, when the person expires, his family then gets the full amount of the policy. This is how the insurance policies work. They are absolutely risk-free investments and that's why many people invest in them as a part of their retirement financial planning. However, for people who want the same benefits of a life insurance policy, at the same time, want to increase their earnings through them, there are the variable life insurance policies. Let's find out whether you should invest in them or not.

Variable Life Insurance Policy

This insurance policy offers the same financial security to the beneficiaries of the policy holder as any other policy would, the only difference is that it comes with an investment option. A variable policy is a whole life insurance policy i.e. it provides you coverage till the time of your death. When you invest in this policy, a separate account, also known as cash value account is opened, in which a part of your premium goes. The premiums collected over time as well as the interests earned in this account can be used by the policy holder to invest in bonds, equities, stocks or whatever investment options the insurance company is offering. The death benefit which your beneficiaries will get as well as the cash value of this account may thus vary in accordance with how your investments are performing. So, if your investments stand good, you can actually make money through this insurance policy.

Advantages and Disadvantages of Variable Life Insurance

The biggest advantage of this policy is that the cash value account can be accessed by a person anytime to pay his premiums for the policy. Another benefit is that a person does not need to pay yearly taxes on this cash value account. Only when the policy is surrendered that taxes on the money in cash value account are calculated and need to be paid.

The biggest drawback is that if the investments do not perform well, a person can incur losses through this policy. This reduces the death benefit as well as the amount of money in the cash value account. Thus, this life insurance policy does not offer the same kind of security as the other kinds of policies. In case of losses, a person may actually need to pay more premium amounts to keep the policy in force. Another drawback of this policy is that a person cannot withdraw cash from the cash value account during his lifetime. Lastly, a variable life insurance policy is costlier than all other kinds of insurance policies, due to the investment component involved.

While purchasing this insurance policy, a person should look at his financial goals and then make the decision with regards to the kind of policies he wants to opt for. If security and a fixed death benefit is what you are looking for then variable life insurance policy is not for you. However, if you are ready to take the risks anticipating high earnings, this insurance policy is exactly what you need!