List of Pros and Cons of Variable Life Insurance
There are many types of life insurance policies you can choose from. You can offer for the traditional life insurance policies that offer a fixed sum of money as coverage in the event of the death of the insured. The sum assured is also payable at the time of maturity of the policy which is the end of the term. Most policies offer a sum assured with bonuses. Some policies will offer a sum assured which will also be the coverage at the time of death.
A few policies will offer the life coverage even after paying the sum assured at the end of the term if the insured outlives the policy. These are called whole life policy. Then there is term life insurance which doesn’t offer any sum assured if the insured is alive by the end of the chosen period of time or the policy term but will offer much greater death coverage at relatively low premiums. There is usually no sum assured in term life insurance if the insured outlives the policy.
Another variant is the variable life insurance. The concept of variable life insurance is not very old. But it has become very popular in recent years. Variable life insurance allows the insured to choose the investments where the money paid in the form of premiums will be put in. This choice allows the insured to opt for safe or risky investments, different kinds of assets and stocks thereby making way for greater returns. There is a risk of compromising the security of the investments as well. Let us explore the variable life insurance pros and cons.
List of Pros of Variable Life Insurance
1. Greater Returns
Variable life insurance allows the insured to generate greater returns than what a normal insurance will offer. Typical whole life insurance plays it safe and assures the least returns but maximum security. Term life insurance offers the least returns should the insured outlive the policy but the returns are high at the time of death within the term. Variable life insurance can generate the maximum returns because of the very nature of the investments. Typical life insurance policies do not allow the insured to choose where the premiums would be invested. Hence, the insured has no role to play in generating the returns. While there is death coverage and prospects of bonuses with variable life insurance, there is the additional liberty to have more money by the end of the term.
2. Overcoming Inflation
Variable life insurance doesn’t really overcome inflationary impacts as a given but there is the chance of better handling the impact of inflation. Ten or twenty years life insurance terms and the longer terms don’t really factor in the inflationary economics. The sum assured that seemed great at the time of signing up may not be much when the term ends. Variable life insurance will allow you to react to inflation as and when it happens. You can choose to go for certain investments at different stages of the term to generate more returns. Hence, you can counter inflation if not negate it entirely.
3. Tax Deferral
Variable life insurance has fixed premiums, fixed terms and guaranteed death benefit. None of those changes compared to traditional life insurance or even term life insurance. There is the added advantage of deferring taxes. Since the funds in the account of the insured are being used for investment purposes, the returns or the lack of it can be used to defer taxes. The investments can be factored in and can be used to get deductibles when desired and more taxes can be paid when one can due to generous returns.
4. Short Term Loans
Variable life insurance policies allow you to borrow some funds from the account. While normal life insurance policies can also be used as guarantor or security for some loans, the variable life insurance policy allows the fund itself to be used as the source for the loan. Some insurers levy very little interest and some special circumstances may pave the way for interest free loans.
List of Cons of Variable Life Insurance
1. Higher Premiums
The premiums of variable life insurance are higher than the typical permanent or whole life insurance and term life insurance. Although the premiums are fixed, the advantage of being able to choose the investment vehicles will come at a price.
2. Understanding of Investment Vehicles
Variable life insurance will only help those who have an understanding of stocks, mutual funds or various types of investments. Those who have no understanding or cannot learn the tricks of these trades will benefit little or not at all.
3. Tedious & Risky
The insured must be involved in the policy and will have to make decisions throughout the term of the variable life insurance policy. You may not have the peace of mind due to the labor involved and the whole premise is also risky. You may not have any benefit in the end if you lose money with your choice of investments. The higher premiums will have been paid in futility.