Variable Life Insurance (VLI) Coverage: An Expert Guide (2024)
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Travis Thompson
Licensed Insurance Agent
Travis Thompson has been a licensed insurance agent for nearly five years. After obtaining his life and health insurance licenses, he began working for Symmetry Financial Group as a State Licensed Field Underwriter. In this position, he learned the coverage options and limits surrounding mortgage protection. He advised clients on the coverage needed to protect them in the event of a death, critica...
Licensed Insurance Agent
UPDATED: Feb 13, 2024
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Editorial Guidelines: We are a free online resource for anyone interested in learning more about insurance. Our goal is to be an objective, third-party resource for everything insurance related. We update our site regularly, and all content is reviewed by insurance experts.
UPDATED: Feb 13, 2024
It’s all about you. We want to help you make the right coverage choices.
Advertiser Disclosure: We strive to help you make confident insurance decisions. Comparison shopping should be easy. We are not affiliated with any one insurance provider and cannot guarantee quotes from any single provider.
Our insurance industry partnerships don’t influence our content. Our opinions are our own. To compare quotes from many different insurance companies please enter your ZIP code on this page to use the free quote tool. The more quotes you compare, the more chances to save.
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As your family grows, you might be taking steps to ensure your loved ones will be protected when you’re gone. Life insurance offers your family financial security and peace of mind. But with so many options to choose from, it can be hard to narrow down the one that’s right for you.
If you’re looking for a life insurance option that offers maximum flexibility and control over financial decisions, then you may be interested in variable life insurance.
What is variable life insurance? Variable life combines death benefit coverage with the opportunity to invest money into the stock market. If you’re curious to see if it’s the option for you, keep reading to learn more about variable life insurance, and how to find the right insurance plan and provider.
How Variable Life Insurance Works
First, let’s start with the basics—what is the mechanism behind how life insurance work?
Variable life insurance is a policy that allows for greater control over your money as well as the potential for financial growth.
Your annual or monthly premium payments go into an account that will be used for your investment goals. A small portion is taken out to cover fees, but the rest can be invested into stocks, equity funds, bonds and money market mutual funds. This means the cash value and death benefits may fluctuate according to the market.
Some key features include:
- Investment components without a cap
- A cash value account
- A type of permanent life insurance
- Tax-free, flexible death benefits
Cash Value
Cash value is an essential component of variable life insurance. So, to understand why it can be beneficial, you may want to know a little more about it.
Cash value “typically earns interest or other investment gains and grows tax-deferred.” A part of your premium payment goes into your cash value account and with variable life, a part of it goes into investments. But how can you access it? You can access your cash value and use that money to supplement your retirement income or for an emergency.
Here are a few ways you can access it:
- Cancel your coverage so you can “surrender” the policy and get money back
- Borrow your cash value as a loan
- Withdraw fund
Read more: What is cash value in life insurance?
Variable Universal vs Variable Life Insurance
If you’re just starting to explore different insurance policies, it’s easy to mix up variable universal and variable life insurance. Yet, these two policies have significant differences that you may want to be aware of when doing your research.
Here’s how they compare:
- They both can be risky. Your cash value and death benefits are subject to fluctuation according to the stock market.
- They both allow your cash values to expand on a tax-deferred basis.
- Both of these options come with a security investment risk, which means they are both considered a securities contract. So, they are governed under securities laws.
- Variable universal life insurance has more flexible death benefits and premiums. It offers a guaranteed death benefit even if your investments drop in value.
- Variable life offers a guaranteed death benefit but requires higher premiums.
- Variable universal has two death benefits options: fixed and variable.
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Term vs Permanent Life Insurance
When you’re exploring your life insurance options, there are two major types you’ll encounter: term and whole life/permanent. To understand which may be the best solution for you, let’s break down how they’re different:
- Duration – The major difference is their timeframe. Term life insurance lasts only for a specific time, which can be one to 30 years. Permanent life insurance never expires so it lasts as long as you do.
- Death benefits – In term insurance, the death benefit can either stay the same or drop a little every year during the policy’s term. Plus it only pays a death benefit if you were to pass before the end of the term. Permanent insurance always pays a death benefit.
- Cash value — Permanent insurance offers a cash value that you can use to invest in the stock market. Term insurance doesn’t offer a cash value component.
The Benefits of Variable Life
The structure of this life insurance policy allows you the most control and flexibility over your insurance and your legacy. The combination of both investment and life insurance compliments means you can expect several benefits including:
- Adjust premiums based on your needs and investment plans
- Control over where your money goes
- Invest as much as want into the stock market without a limitation
- The chance for a higher return on your insurance policy
- Potential estate tax deductions and other tax benefits
The Drawbacks of Variable Life
When it comes to variable life insurance, there are a few drawbacks and risks to this policy. But, all types of insurance have their pros and their cons. It all depends on what works for you and what you’re comfortable with.
Some drawbacks include:
- Fees and expenses may be higher than other policies depending on certain factors
- Not a short-term tool for saving money
- The policy may lapse if you don’t maintain a certain cash value
- No guaranteed rate of return since investing in the stock market can significantly raise or lower your death benefits and overall cash value
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The Right Insurance Fit
Whenever you’re shopping for an insurance plan, you want to find one that suits your goals and financial plans. So, how do you know if a variable is right for you?
A variable life insurance policy would be a good fit for investors who have a high net worth and would like to continue building their wealth. Since variable insurance can be more expensive than the other policies and involves investing in the stock market, you would need to be someone comfortable with taking risks and able to afford the long-term commitment.
You have the option for a potentially higher cash value return unlike with other policies. But, if you’re unsure of bundling your life insurance with investing or if you’re unfamiliar with the stock market, it may not be the ideal setup for you.
When to Get Life Insurance
Most insurance companies would agree that it’s best to get your life insurance policy while you’re still alive. In fact, people are often encouraged to get one as soon as possible even in their twenties.
While you may not have spent your twenties thinking about life insurance, as you get older, it’ll become increasingly necessary for you to have one to protect your family and your assets. Unsure if you’re ready for or even need a life insurance policy? Well, here are some signs that indicate you may need one:
- You bought a home
- You’re thinking of having children
- You already have a child
- You’re married
- You’re supporting your parents financially
- You have student loan debt
- You job is a bit dangerous or high-risk
- You’re self-employed or work at your family-owned business
Remember that the younger and healthier you are, the cheaper the premiums will be. As you get older, it can get more costly and complicated.
The Types of Permanent Life Insurance
Term and permanent life insurance are two categories that encompass several subcategories of insurance plans. Within the permanent life category, there is
- Variable life insurance
- Variable universal life Insurance
- Whole life insurance
- Universal or adjustable life insurance
Each comes with its own set of benefits and drawbacks. This is why it’s important to do your research and to consult a trusted insurance agent. Once you know what they include, you’ll have an easier time making a decision.
The policy you choose should fit your life, your budget, and your goals.
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What to Consider
Before you make a significant investment, it’s important to evaluate your situation and what you could be getting into.
Here’s what you should consider:
- What do you need from your insurance?
- What are your investment objectives and goals?
- Can your budget support fees and expenses that are a part of variable life insurance?
- Is the insurance company you’re looking at financially strong?
- How much insurance do you think you’ll need?
- How long will you need your insurance?
Getting an insurance policy requires a lot of research and thought. With so much information out there, you need a trusted source that can help you understand and narrow down your options.
Case Studies: Examples of Variable Life Insurance in Action
Case Study 1: The Smith Family
The Smith family consists of John, a 35-year-old business owner, and his wife Sarah, a stay-at-home mom. They have two young children. Concerned about the financial security of his family in the event of his untimely death, John decided to explore life insurance options. After careful consideration, he opted for a variable life insurance policy.
With variable life insurance, John could not only provide a death benefit to his beneficiaries but also have the opportunity to invest a portion of his premium payments. This appealed to him as he wanted his life insurance policy to offer both protection and the potential for financial growth.
By investing in a mix of stocks, equity funds, bonds, and money market mutual funds, John aimed to build a cash value that could support his family’s future needs.
Case Study 2: The Rodriguez Couple
Carlos and Maria Rodriguez, both in their early 40s, were looking for a life insurance policy that could accommodate their long-term financial goals. They wanted coverage that would not only provide for their children’s education and mortgage in the event of their passing but also allow them to build wealth over time. After thorough research, they decided to go with variable life insurance.
By choosing variable life insurance, Carlos and Maria were able to take advantage of the investment component of the policy. They allocated a portion of their premium payments toward various investment options based on their risk tolerance and financial objectives.
This gave them the flexibility to adapt their investment strategy over time and potentially generate higher cash value returns. The variable life insurance policy offered them the control they desired in managing their insurance and investment needs.
Case Study 3: The Johnson Family
Sarah Johnson, a 50-year-old executive, wanted to secure a life insurance policy that could provide her with financial protection and the potential for growth. She had accumulated significant assets and wanted to ensure that her family would be well taken care of in her absence. After consulting with a financial advisor, Sarah decided to explore variable life insurance. (For more information, read our “How to Find a Life Insurance Advisor“).
Variable life insurance appealed to Sarah because it allowed her to not only provide a death benefit but also invest a portion of her premium payments. Given her high net worth, Sarah was comfortable with taking on investment risks and had a long-term outlook.
She aimed to maximize her cash value returns by carefully selecting a diversified portfolio of stocks, equity funds, bonds, and money market mutual funds. The variable life insurance policy aligned with Sarah’s financial goals and offered her the control and potential growth she desired.
Compare Your Options
Buying a house or starting a family can be monumental milestones in your life. But, they can also put things in perspective and emphasize the value of life insurance. Variable life insurance can be an ideal solution for those who value control and flexibility when it comes to their legacy and their financial decisions. However, you do have other options.
Finding the best life insurance plan for you means doing your research so you know exactly what you want and what will work for your life. Use our comparison tool to compare your insurance options and save money while doing so.
You can get a free quote using our one-stop online insurance guide. Enter in your zip code to get started.
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Frequently Asked Questions
What is Variable Life Insurance (VLI) coverage?
Variable Life Insurance (VLI) coverage is a type of permanent life insurance policy that offers a death benefit to beneficiaries upon the policyholder’s death, as well as an investment component. It allows policyholders to allocate a portion of their premiums into various investment options, such as stocks, bonds, or mutual funds, which can potentially grow over time.
How does Variable Life Insurance differ from other types of life insurance?
Variable Life Insurance differs from other types of life insurance, such as whole life or term life insurance, in that it offers policyholders the opportunity to invest a portion of their premiums into different investment options. The cash value of a VLI policy is directly linked to the performance of these investments, making it subject to market fluctuations.
What are the benefits of Variable Life Insurance coverage?
Variable Life Insurance offers several benefits, including:
- Death benefit: Provides a lump sum payout to beneficiaries upon the policyholder’s death.
- Cash value growth potential: The investment component of VLI policies allows policyholders to potentially accumulate cash value over time, depending on the performance of the chosen investment options.
- Flexibility: Policyholders can typically adjust the amount of their premium allocations to different investment options, based on their risk tolerance and investment goals.
- Tax advantages: The cash value growth within a VLI policy is tax-deferred, meaning that policyholders won’t owe taxes on the growth until they withdraw the funds.
What are the risks associated with Variable Life Insurance?
While Variable Life Insurance offers potential investment growth, it also comes with certain risks, including:
- Market volatility: The cash value of a VLI policy can fluctuate based on the performance of the underlying investments. If the investments perform poorly, the cash value may decrease, affecting the policy’s overall value.
- Policy lapse: If the policyholder fails to pay premiums or the investment performance is poor, the cash value may deplete over time, potentially resulting in policy termination.
- No guaranteed returns: Unlike whole life insurance, VLI policies do not offer guaranteed cash value growth. The performance of the investments determines the cash value accumulation.
Who is Variable Life Insurance coverage suitable for?
Variable Life Insurance coverage is suitable for individuals who:
- Have a long-term investment horizon and are comfortable with market fluctuations.
- Seek both life insurance protection and an opportunity for investment growth.
- Can afford to pay higher premiums than what would be required for term life insurance.
- Have a good understanding of investment options and are willing to actively manage their policy’s investment allocations.
Are you looking for free insurance quotes?
Your one-stop online insurance guide. Get free quotes now!
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Travis Thompson
Licensed Insurance Agent
Travis Thompson has been a licensed insurance agent for nearly five years. After obtaining his life and health insurance licenses, he began working for Symmetry Financial Group as a State Licensed Field Underwriter. In this position, he learned the coverage options and limits surrounding mortgage protection. He advised clients on the coverage needed to protect them in the event of a death, critica...
Licensed Insurance Agent
Editorial Guidelines: We are a free online resource for anyone interested in learning more about insurance. Our goal is to be an objective, third-party resource for everything insurance related. We update our site regularly, and all content is reviewed by insurance experts.