Fundamentals of Variable Life Insurance Policy

Wondering whether variable life insurance is the right policy for you? You are not alone.

Variable life insurance policy is a form of permanent life insurance policy with a cash value investment component. That is, it has two components: your life insurance and sub-accounts which are usually invested in stock or bond markets. If you own a variable life insurance, you are expected to pay a fixed amount of premiums throughout the life of the contract.

But the unique part of variable life insurance, unlike whole life insurance, is that the sub-accounts will be used to invest in bonds, stocks, and other equities depending on your chosen sub-accounts. Put simply, you can decide to invest your sub-accounts in any of those equities. But there is a caveat: your principal and investment return is susceptible to a lot of variations based on the performance of your sub-accounts.

So, if your sub-accounts perform badly, rest assured that your death benefit would be minimal even though it would not be below a certain amount specified in the contract. However, if your sub-account performs well, you can use the interest to pay for your premium.

Also, before you die, you can decide to withdraw all the money from your sub-accounts. But to do this, you need to surrender your policy, a move that will reduce your cash value due to tax and surrender charges. As mistakes can be very costly if things go south, make sure you understand the pros and cons of variable life insurance policy before you make your final decisions. Or better still, get professional advice from your advisor or insurance agent.