Should I buy variable life insurance?
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UPDATED: Nov 26, 2011
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If you are comfortable with a certain amount of risk in your life insurance investment and like to have greater control then you should consider a variable life insurance policy. One of the most diverse and potentially rewarding life insurance types is variable life insurance.
Before considering this type of life insurance however you should be aware of some of the potential disadvantages and advantage of purchasing such coverage. There are many variations on standard life insurance, and each one is customized to suit your requirements regarding your health, your familial situation, and most importantly, your budget.
What is variable life insurance?
As the name suggests, variable life insurance is popular because it allows you to vary the way in which your premiums are used, and it is almost unique because not all of your premiums go towards life insurance itself. When you sign up for a variable life insurance policy, you get the option to allocate some of the premium that you pay into a portfolio, which is run under the auspices of the broader company itself.
For example, you can choose to send some of your premium into stocks and bonds or equities. This is so you can diversify your portfolio while retaining the benefits of insurance, with the most obvious, and important being that your beneficiary will receive a full payout upon your death.
This kind of insurance requires thorough investigation as there are greater potential risks associated with splitting your premiums, but if you are smart in the way that you invest your premiums, then you may receive benefits that you would not with a normal insurance plan.
Should I divide my life insurance premiums?
With standard insurance schemes, you will be expected to pay a fixed monthly premium, which is set in place to cover the costs of your treatment should you require medical treatment (health insurance), or to support your family should you pass away or become disabled (life insurance). Most insurance companies will offer you a premium that is fixed for a specified time, and all of the money that you pay as a monthly premium.
Variable life insurance is different in that not all of the money you pay as a premium will be used as a payout in the event of your death. Because insurance providers operate in a broad array of businesses, they often have investment portfolio attachments available to these clients.
Variable life insurance is structured in such a way that instead of paying your full premium as coverage in case you pass away, you can diversify your investment and place some of the money that would ordinarily have formed part of your coverage premium into other portfolios that may yield benefits for you.
The idea is that your premium payments can be used to make you money — the payments that you make are investments that are divided into life insurance, and portfolio diversity. The money that you make on the investments made outside of your life insurance payments can be used for whatever you choose.
What payment options are available?
One of the major differences between standard life cover and variable life insurance is the way in which premium payments are structured. Instead of paying a fixed monthly premium, you add money to your insurance portfolio whenever you see fit. This means that you do not have to pay an actual premium, but rather invest in divisions of your portfolio, although you will need to place some money into the coverage part of your scheme in order to cover the expenses and details of your policy should you pass away.
You have the option to pay money into any part of your insurance portfolio whenever you see fit, and while this does offer a certain freedom, there is always the risk that you do not have enough money to pay for your life insurance, and therein lay the risk of variable life insurance.
What are some potential disadvantages of variable life insurance?
Your insurance scheme is divided so that you have an investment portfolio and life insurance, and the two naturally rely on one another. The danger is that you will have to cover the costs of an investment portfolio that performs poorly, meaning that you will have to pay money out of your own pocket to maintain your life insurance.
When you agree to the terms of your insurance, there will be a figure that is set aside for life insurance alone. If your investments do not perform, you are going to have to pay in an amount to make sure that that figure is never in jeopardy. The major area of concern when it comes to variable life insurance is the fact that it is market dependent. It is not for the faint-hearted, and if you do not have a thorough understanding of market fluctuations and risks, then variable life insurance may not be for you.
What are some advantages of variable life insurance?
As with any diverse investment portfolio, there is the potential of making a significant return on your initial investment, and this means that you will only have to pay a small amount on your monthly “premium” in order to maintain your coverage. You can also make a significant amount through the stocks and bonds that you are invested in. In addition you may not be taxed on your earnings while the policy is in operation.
Variable life insurance is an interesting option that may be of use to you if you have the knowledge of the markets to make your investment grow, but always bear in mind that it can be quite a risky and expensive form of life insurance.
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