Variable life insurance is a form of whole life insurance that accumulates cash value on a tax-deferred basis. Variable life
insurance operates similarly to a mutual fund because the insured pays premiums that go into a separate investment account owned by the insured. The variable life insurance policy yields a minimum death benefit to the insured like other life insurance policies. In addition, variable life insurance will have cash value that varies based upon the performance of the investments and part of the
death benefit may be variable as well. Variable life insurance policies are securities and must follow federal securities laws as well as state insurance regulation. Given the investment risks posed by variable life insurance, regulators emphasize the need for companies to clearly explain policy risks to individuals and distinguish investment accounts and policies from others. Many issues arising with variable life insurance regard companies not following the formalities of securities and consumer protection law. Also, individuals often take on debt based on the
insurance policies which can be risky. Further, variable life insurance policies have many fees involved in their creation and management which may make them improper for some individuals. For more information on requirements and important aspects of variable life insurance, see the Securities and Exchange Commission guidance
here. [Last updated in April of 2022 by the Wex Definitions Team]
The Investments of a Variable Life Insurance PolicyA variable whole life policy is one for which a policyholder can choose investments in which the premiums will be invested. He or she can usually select from several different investment objectives. Some insurance companies offer up to 50 different categories of investments. Depending on who offers the policy, the options can range from conservative to aggressive. Options usually also exist for selection of domestic, international and emerging market asset allocation. The policyholder is completely responsible for deciding upon the investments. The insurance company simply manages the account. Policyholder investments are not co-mingled in any account that has insurance company or other investor assets. Insurance agents who sell variable whole life policies must be licensed to sell insurance and securities. Some insurance companies also allow policyholders to choose a death benefit that is fixed or one that is variable. A fixed death benefit pays a level amount to the beneficiary, regardless of increases or decreases to cash account. A variable death benefit, however, pays an amount determined by the cash value retained in the policy. While a variable death benefit may seem like a wise choice in a rising market, policyholders are cautioned to choose the death benefit carefully. A market downturn can result in losses that may reduce the amount of the death benefit, leaving a beneficiary vulnerable financially. Variable life insurance policies are not suited for those who prefer not to take financial risks or for those whose beneficiaries would not be able to do with a reduction in the death benefit. Also, while insurance policies can sometimes be a good vehicle to save for college tuition, a variable whole life insurance policy is usually not. Even though the cash account has the potential to increase, the policyholder risks incurring losses that might not be made back in time. Variable life insurance policies are considered to be securities and are not insured by the FDIC. While the insurance company selling the variable life policy must be a member of the Securities Investor Protection Corporation (SIPC), this organization may not be able to intervene. It is the job of the SIPC to “make whole” investors who have lost assets due to a bankruptcy or other financial calamity encountered by the company. Due to higher premiums than other kinds of insurance and a possible decrease in the value of the policy, the lapse rate of variable life policies is much higher. Therefore, suitability of this type of policy is most often financially stable families or individuals who can withstand the shock of market losses and who have other significant cash and liquid assets. Choosing a Whole Life PolicyThere are six main types of whole life insurance from which to choose: Participating Whole LifeThe participating whole life policy “participates” in the financial success of the insurance company. The policyholder can take the dividend as cash payment, add it to the cash account of the policy or use it to offset the cost of the premium. Earnings on a whole life policy grow and compound tax-deferred for as long as the insured pays the premiums. This policy provides one more way to save money for retirement. Compounded growth can accrue much more quickly as money is left in the account to grow over several years if not decades. Non-Participating Whole LifeNo dividend paid on a non-participating whole life policy. Costs, however, remain fixed for the life of the policy and are less than those for a participating policy. Level Premium Whole LifePremiums are paid in installments throughout the life of the insured and remain level. Limited Payment Whole LifeA limited payment whole life policy lets the policyholder pay the premiums for a set number of years rather than over his or her lifetime. Single Premium Whole LifeOne single lump sum premium is used to buy a single premium whole life policy. This policy is frequently used more as an investment strategy or as part of estate planning than it is for the death benefit. A single premium whole life policy can also be purchased in place of a single premium immediate annuity. One of the most significant features of a single premium whole life policy is that equity is available immediately. The policyholder does not have to wait years or even months to use the policy as collateral or to borrow against it. Intermediate Whole LifePremium payments are flexible. The policyholder can change the amount of the premium and the payment schedule based on current needs. What type of premium is variable whole life insurance?Both variable life insurance and whole life insurance are forms of permanent coverage. Premiums are level and neither policy can be canceled due to changes in your health. Both types of life insurance also have a death benefit and accumulate cash value on a tax-deferred basis over time.
What are the characteristics of variable whole life?Variable universal life is a type of permanent life insurance policy. With features that include cash value, investment variety, flexible premiums and a flexible death benefit.
What are the variations of whole life insurance?Whole life insurance has several variations, including limited payment, modified, single-premium, and variable whole life. Different types offer alternative payment options or investment methods.
Is variable whole life a security?Variable life is a type of security that offers fixed premiums and a minimum death benefit. Unlike whole life insurance, its cash value is invested in a portfolio of securities. As the policyholder, you can choose the mix of investments from those the policy offers.
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Variable whole life insurance can be described as what
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