Variable life insurance is a type of permanent life insurance with a strong investment component. It can earn quite a bit of additional money apart from the death benefit, but with some risks associated with investing.
Components of Variable Life
Generally speaking, there are three main components of a permanent life insurance policy: a death benefit, premium payments, and cash value.
The death benefit for variable life may be equal to:
- The face amount,
- The face amount + the cash value of your account, or
- The face amount + the amount of premium payments you contributed to your insurance policy.
You may also be able to get additional features that might increase the value of your death benefit.
The next component is premiums—you must pay a certain amount per month to keep your policy active.
Finally, the unique feature of variable life is the cash value. Every permanent life insurance policy has a cash value element that will build up additional funds apart from your death benefit. Variable life also lets you make bigger, higher-potential investments than other permanent policies.
Benefits and Risks of Variable Life
One of the most notable benefits of this potential growth is the lack of regular taxation. Any income earned through your policy and within your cash value is non-taxable. You pay premiums to cover basic maintenance insurance fees to the company. The rest of your premium is used to invest in investment opportunities such as:
- An index, such as the S&P 500
- A portfolio of equities, such as an emerging markets fund
- Bonds
- A money market fund
There’s potential for massive growth. With this potential, however, comes a risk factor as well. You can lose money in a variable life insurance policy, including the potential loss of your initial investment. With every investment option, there are several risks involved. The main risk is that your investment and any returns depend on the performance of the investment options you choose.
It’s essential, then, that you are relatively confident and knowledgeable about investments. You should be familiar with the fund’s investment objectives and policies, management fees, and other expenses of the fund, its risks and volatility, and whether it contributes to the betterment of your investment portfolio.
The Cost of Variable Life
Every variable life insurance policy has a required basic monthly premium. This covers services fees such as the cost of insurance (COI). Beyond that, it is up to you how much you want to pay monthly. You can pay as much or as little over the basic fee as you like. However, if you miss one payment, you may be forced to surrender your policy and all of the money invested in it. You can purchase a rider to be able to skip premium payments.
Beyond this, there are some other miscellaneous fees to keep in mind. These fees can include sales fees, surrender charges, mortality and expense fees, administration fees, loan interest, underlying fund expenses, and more. Many of them will be immersed in your monthly premium.
Investment Guidance for Everyone—Call Today
You want quality life insurance, but you can’t do it yourself. The Coleman Agency will work with you to understand your budget, financial needs, and goals. To learn more, call (803) 802-7507 today.
