Variable Life and Variable Universal Life insurance policies are both forms of cash-value, or permanent, life insurance. As opposed to term insurance, where you pay a premium for a fixed period and the only payout is a death benefit, permanent life insurance policies provide lifetime coverage, and a portion of the premium is invested to provide cash value over the life of the policy.
In Whole Life insurance, the most conservative cash-value policy, you pay a set premium, the insurance company invests a portion of your premium, and you receive a guaranteed rate of return on the cash-value component and a guaranteed death benefit. Universal Life allows some flexibility over Whole Life by allowing you to raise or lower your premium payments, and choose between constant or increasing death benefits.
Beyond these options are the "Variable" policies. The word "variable" can cause confusion because variability of premiums was introduced in the Universal policy. However, "variable" in these cases refers more to the benefits and potential risks.
Variable Life shares a fixed premium with Whole Life, and typically offers a minimum guaranteed death benefit. Unlike Whole Life, there is potential for increase in the death benefits, and there is no guarantee on the cash value. It rises and falls with the performance of your investments – which you choose from a series of options. Within the types of cash-value life insurance, Variable Life and Variable Universal Life have the greatest amount of risk.
Variable Universal Life adds flexible premium payments to the Variable Life policy, but requires a minimum payment schedule to guarantee a minimum death benefit.
Given that background, let's look at the advantages and disadvantages of the variable policies.
- Risk – Since the worth of variable policies rise and fall with your investments, risk is significantly increased. Your cash-value can potentially drop to zero and risk policy cancellation without increased premiums.
- Guarantees – To maintain the minimum guaranteed death benefit in either case, you will pay extra.
- Loans – You can borrow against the cash value of your policy, just as you can with Whole Life. There are few restrictions and no credit check or credit rating effects. However, because of the variable nature of your cash value, the loan amount may be limited.
- Taxes – The cash-value of variable policies grows tax-deferred – you pay taxes on earnings when the policy is surrendered.
- Death Benefits – You can alter the amount of death benefit up or down, within limitations. There may be surrender charges to lower the benefit, and an increase may require medical verification of your health. Nevertheless, the benefits are flexible in comparison to other policies.
Keep in mind that the death benefits go to your beneficiaries, but the unused cash-value goes to the insurance company. What should you do with it instead? Read on.
- Premium Payments – Once your cash-value increases sufficiently, you can use it to pay a portion of your premiums. This is an excellent way to deal with excess cash-value.
On the flipside, missed payments can put you at risk for cancellation, thus negating your benefits. If you are paying premiums out of the cash-value, make sure payments are being processed correctly.
- Control of Investments – You do have some control over investments – more control than you would have with a Whole Life Policy, but not as much, as if you handled your own investments. Many experts argue that if you are a savvy investor, you should save the premium money, buy a cheaper term-life policy, and invest the difference.
- Fees – Since there is more management involved, fees may be relatively higher. Compared to owning a stock outside of insurance, this is almost certainly the case.
Variable Life and Variable Universal Life policies give you lifetime coverage with some investment return and significant control. If you are a relatively confident investor and prefer the lifetime coverage aspect of cash-value policies, these policies may be right for you. If you do not care about the lifetime coverage aspect and have sufficient investing acumen, you may be better off going with the cheaper term life policies and investing the difference yourself. Only you can make that call.