Variable Life Insurance

Variable life insurance allows people to purchase insurance policies and have the insurance company invest the premiums to allow for the growth of the policy in a tax-sheltered account.

1. Explanation of Variable Life Insurance

Most people are familiar with what is called whole life insurance. In this type of insurance policy, the holder purchases a policy for a set amount each month. This monthly premium typically changes little, if any, over the course of the policy. The payout on these policies also is set at the signing of the contract.

Variable life insurance works a bit differently, however. In this type of policy, the policyholder buys the policy based on the investment of a certain amount of capital. This money then is invested in various stocks or mutual funds, depending on the insurance company offerings and the owner's choice, and the money earned through this investment is used to determine the payout for the policy.

This type of insurance policy works for people who have significant money to invest in the policy and who want a temporary tax shelter for that money. For other people, though, the variable life insurance policy is more work than they want in a life insurance policy. The whole life policies can be a better choice because they give a guaranteed payout and payment every month.

The variable life insurance policy has the potential to be worth more money, however, and has the benefit of being useful if the person does not want to pay for the policy indefinitely.

2. Tax Advantages of Variable Life Insurance

Variable life insurance policies have an interesting advantage over regular life insurance policies and investments. For the most part, money made through investments is taxed annually as part of a household's income. Because life insurance policies are intended to cover expenses and liabilities in the case of death, the federal government does not tax any money made from investing variable life insurance funds.

This tax advantage basically means that the life insurance policy can continue to earn money without the holder paying anything at the time. The money earned in one year continues to grow over time as the money is reinvested throughout the life of the policy.

Holders of variable life insurance policies do have the option of getting out of the policy, however. These policies have a "cash value," which is the amount the person can get at a certain point in time by cashing out the policy. If the person opts for the cash-out of the variable life insurance policy, then the government taxes all of the interest earned as income tax. Knowing how much of this money will go toward income tax payments is helpful in determining the real value of cashing out the policy or leaving it until one dies, then allowing it to roll over to the estate. These decisions can get very complex quickly.

3. Benefits of Getting Variable Life Insurance

The primary benefit of a variable life insurance policy is that the owner of the policy can opt to cash out the policy to receive money rather than waiting for others to inherit the money. With whole life insurance, you will lose out on any money you have paid toward the premium if you opt not to pay or cannot pay any longer. With a variable policy, however, you will be able to get certain cash value, based on the growth of the investments associated with the policy, if you need to cancel the policy.

Variable life insurance policies also grow so that you can get more money than you anticipated if your insurance company is able to offer sound investment choices for this policy. The insurance policy does not stagnate. With whole life policies, some people feel they are paying into a system without much choice in how much they are paying or how much they will get. With a variable life insurance policy, the policyholder is able to exert more control over the final dollar amount he or she will receive because of the investment property of the policy.

Another major benefit is that the money earned on investing the premiums is tax-sheltered instead of being taxed as household income as would happen with other types of investments.

4. Risks of Getting Variable Life Insurance

Getting variable life insurance may seem like the best idea to help earn a bit of extra money and avoid the income taxes on it for the time being, but there are risks involved in getting this type of policy. First, it requires a fairly significant amount of money to make anything from the proposal. If you are putting the same amount toward a whole life and variable life insurance policy, then chances are good that the whole life policy will pay out more money on your death. The variable life policies really require a good amount of financial investment to make them worthwhile.

Variable life insurance also has the benefit of being taxed if the owner opts to cash out the policy. While allowing money to grow tax-free is appealing, it should not be done without considering what happens in the end. For some people, paying taxes later on the money is acceptable. Others can be caught off-guard, though. If you plan to get a variable life insurance policy and will cash it out, then you need to think about how much money you will need to put away from the cash out to cover the tax burden the next year. These kinds of issues are ones you should discuss with a qualified financial professional before making a decision.

5. Cost of Variable Life Insurance

The cost of variable life insurance changes dramatically depending on how your portfolio is doing. Many of these policies are called variable universal life insurance. Though it may not be completely accurate, the universal part means the policy has a universal, or all-encompassing, range for the determination of monthly premiums. Instead of paying the same amount each month, you will pay based on what your investments are doing.

In some months, your bill may not be anything because your portfolio is growing well, and the insurance company is re-investing that money. In other months, the portfolio associated with your policy may not be doing as well, and you will be expected to ante up a considerable sum to cover these costs. If you have a good policy and understand how it works, then you should be able to budget for the maximum amount the policy can cost each month so that you will be prepared for the months when you need to pay a larger amount.

The cost of the variable life insurance policy will vary with the amount you would like to cash out or have as a death benefit. If you will not need as much money to cover your dependents in case of your death, then you may be able to contribute less with the variable policy.

6. Cashing Out Variable Life Insurance Policies

Variable life insurance policies come with a lot of unfamiliar terms, such as cash value and death benefits. For most life insurance policies, the policy has no cash value. If you stop paying your premiums, then the policy coverage lapses and you cannot get coverage any longer. For variable policies, though, you have an option to consider in case you want or need to stop paying the premiums on the policy.

You can opt to get out of the policy and accept the cash value of the policy. This cash value is equal to an amount related to the growth of the financial investment you have made over the course of the time you have owned the policy. You can find out how much this cash out amount is at any point by contacting your insurance policy or checking your statements.

This cash value varies from month to month. Many people intend to use the variable life insurance policy as a sort of retirement plan. People will pay into the policy with the idea that they can leave it as part of their estate if they die, but if they need the money, then they have the option to get the lump sum when needed. Getting this money is easier than other retirement vehicles because the owner controls the withdrawal.

7. The Death Benefit for Variable Life Insurance

The death benefit is the amount of money the policy will be worth if the person who purchased the policy dies. This benefit often is larger than the cash value of the policy because the insurance company counts on the person dying in a long while. During that time, the insurance company will be able to use the return they are making from the premiums to make even more money. Though the insurance company pays out more in the end for death benefits, the company also is able to make more money on the policy.

Knowing the value of the death benefits of a variable life insurance policy can help decide whether to cash out the policy. In some instances, elderly people need assistance being taken care of. Their relatives may want to consider cashing out the policy. Many times, though, the death benefit may be so large that the family opts to hold out and pay for the care with other funds and get the death benefit because it will cover any costs associated with using other money to cover the cost of care.

These kinds of decisions are very complex and involve both emotional and financial factors. Understanding whether to wait for death benefits is a tough decision that should be made with considerable input from involved parties.

8. Getting Variable Life Insurance Quotes

Getting variable life insurance quotes is a bit different from getting quotes for other insurance policies. For starters, you may have to take a medical exam, which is fairly common for any life insurance policy. You can search out variable life insurance policies with no medical exams, but you likely still will need to complete at least a questionnaire about your health.

Beyond the medical side of things, you will need to find out about any guaranteed minimum payouts and maximum premiums for the policies. Many of the policies have minimum payouts in place. These clauses guarantee you a certain amount of money, which may be equal to what you paid or slightly above, if the policy does not do well. This minimum payout is not a universal occurrence, so you should understand what you are getting if a quote comes back without a minimum payout.

Maximum premiums are the most you will need to pay monthly or quarterly on your policy. If you are on a budget or are not able to contribute large amounts of money to the policy, then you need to consider the maximum premium amount in any quote you receive.

The quotes for variable life policies are not just a premium number and a payout. They are more complicated and involve more questions and answers.

9. Getting Variable Life Insurance With No Medical Exams

Life insurance companies ask questions about medical health or require a physical because they do not want to insure people if they are going to die soon. Though granting a life insurance policy to anyone with this idea in mind is a risk for the company, medical check-ups allow the company to control the amount of loss they take.

For people with health problems, though, this little obstacle can become a big hurdle. Not only do insurance companies increase premiums for minor health problems, they often deny coverage to people with chronic or acute illnesses. For this reason, you may want to seek out a variable life insurance policy with no medical exams. These policies may be slightly more expensive because the company understands people with health problems will seek them out, but, in general, they are fairly affordable. They certainly offer comfort to families who may not otherwise be able to survive a death.

Understanding the ramifications of variable life insurance with no medical exams, primarily that you may be paying higher premiums and that the cash value and death benefits may be calculated differently, will help you decide if this type of policy is right for you. In some cases, these policies work better; in others, the person would do better with a traditional variable life insurance policy.
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