Variable life insurance is a type of permanent life insurance that not only provides lifelong coverage but also has an investment component. Let us understand what variable life insurance is, how it works, its benefits, and how to decide if it's the right choice for you.
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Variable life insurance is an insurance for life policy that provides a death benefit to your nominees when you pass away and includes a cash value component that can be invested in various sub-accounts. These sub-accounts are similar to mutual funds and can include stocks, bonds, and other investments. The cash value and death benefit can change based on the performance of these investments. Let us look at the workings of variable life insurance for a better understanding.
Term Plans
Let us take a look at how this permanent life insurance works:
Death Benefit
Variable life insurance provides the death benefit to your family in case of an eventuality. This benefit can increase if your investments do well, but it can also decrease if they perform poorly. However, many variable life insurance plans guarantee a minimum death benefit.
Investment Benefit
The cash value component of your variable life insurance policy is invested in sub-accounts. The value of these investments can go up or down depending on market performance.
Premium Payments
The premiums you pay are split into two parts: one part goes towards the insurance component, and the other part is invested in the sub-accounts you choose.
Flexibility and Customizability
You can choose how you want to divide your investments among the available sub-accounts. You also get the flexibility to adjust your premium payments, and death benefit amounts to a certain extent.
A variable life insurance policy works similarly to term life insurance policies: you pay premiums, and your beneficiaries receive a death benefit. As a permanent policy, it provides coverage until your death.
Variable life insurance includes a cash value component that can be used for major expenses. The cash value can be invested in options like mutual funds, and its value depends on your premiums, investment performance, and associated fees. You can also allocate funds to a fixed account with a guaranteed minimum interest rate, such as 3%, to reduce overall risk.
Variable life insurance offers flexible premium payments, allowing you to adjust amounts as long as required fees are covered. Some providers also protect against lapsing coverage if your cash value is insufficient, ensuring the policy remains active during financial difficulties.
Variable life insurance offers tax benefits, particularly through its investment component. The cash value growth is tax-deferred, meaning you don't pay taxes on investment gains until you withdraw them. Additionally, you can take loans against the cash value, using the account as collateral, to access funds tax-free instead of making direct withdrawals. This provides a way to receive income without incurring immediate tax liabilities
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Due to its investment component, variable life insurance has some risks. The cash value and death benefit can fluctuate based on market performance, which means if your chosen funds perform badly, your policy's value may decrease. The difficulty of managing these policies and the absence of guaranteed returns make them less predictable compared to other life insurance options, adding to the overall risk.
Variable life insurance offers a unique combination of lifelong coverage and investment potential, making it an appealing option for those comfortable with market risks and seeking to grow their cash value. By understanding how variable life insurance works, its benefits and drawbacks, and whether it aligns with your financial goals and risk tolerance, you can make an informed decision about whether this type of policy is right for you.
†Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in
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