Variable Life Insurance Plan

A Variable Life insurance policy is a type of permanent insurance (like Whole and Universal Life) that ensures a death benefit. However, it can be more costly due to the fact that the cash value portion of premiums can be directed to a different account. In this account, the cash value may be invested in any of the insurer’s investments like equity funds, bonds and bond funds, mutual funds, and stocks. Since they carry a greater level of risk than traditional permanent insurance (Whole or even Universal), these policies are referred to as securities contracts; henceforth, Variable Life policies have to come with a prospectus. Obviously, this type of permanent insurance is more suitable to certain consumers than others. Additionally, the earnings are completely sheltered against taxes until the policy is “surrendered”. The earnings (interest) on the cash value can be used to pay premiums or portions of premiums. The downside is when investments turn sour; not only does the death benefit of the policy face the potential to decrease, the cash value/cash surrender value will follow suit. When that happens, a Variable Insurance policy will likely become too expensive to maintain. Variable Life: Pros and Cons Variable Life, also known as Variable Appreciable Life, thus has its own distinct pros and cons. The benefit of this arrangement is tax-deferment unless the cash value is surrendered. A VL policy will also enjoy tax-free growth, as the income is tax-deferred. The death benefit and timing/amount of premiums are adjustable within certain parameters. Furthermore, if good investments are made and premiums/insurance costs are in good standing, not only does the affordability of the premiums go down but the cash surrender value spikes. Most insurance companies that offer VL insurance require that a seasoned professional manage this account and direct most of its investments. The cons of a Variable Life are equally as important. Since a VL policy is basically a securities contract (regulating by the Securities branch of the Fed), there’s a great deal of risk. If investments do not perform as expected—or worse, go south—premiums and insurance costs/fees can become unbearable. In addition to a much higher premium, a poorly-performing portfolio can, and most likely will, drive down the cash value and sometimes even the death benefit (face amount). Plus, many insurers mandate that the cash value cannot be accessed penalty-free before retirement. Some offer immediate access to it for things like home refinancing, though. This varies among insurers, though. The only comforting aspect of the latter is that the death benefit can never fall below a predetermined amount—as set forth in the policy. VL insurance is still a very viable alternative Back in the 1990’s, when equity values soared, purchases of VL insurance spiked from around 390, 000 plans in 1990 to around 1.4 million plans in the year 2000. Then, VL insurance accounted for about 55% of the market for separately sold, new cash value plans when compared to new premiums. Total premiums in the first year for all permanent insurance plans rose to around $17 billion in 2000. Of those, VL premiums were around $9.3 billion dollars. More than 94% of variable sales were on the policy form known as variable universal life (VUL), the subject of this report. The firm Tillinghast, the actuary for many insurance providers, recently stated that sales in 2002 are expected to drop from those years by around 30%, mainly due to the slump in the stock market. However, it’s obvious that Variable Life insurance is still a very large market in the U.S., with an estimated 40% (courtesy of the Tillinghast Firm) or greater of new premiums at consistent rates.