Variable life insurance lasts forever, and it grows value by investing in the stock market

Variable life insurance lasts forever, and it grows value by investing in the stock market

February 5, 2021

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  • Variable life insurance is a type of permanent life insurance, meaning it never expires.
  • In addition to a death benefit, there’s a cash value component that’s invested in the stock market.
  • Compared to other permanent life policies, there’s more risk and more potential to grow your money.
  • Policygenius can help you compare life insurance policies to find the right coverage for you, at the right price »

There are two types of life insurance: permanent life and term life. Term life insurance only lasts for a specific timeframe, while permanent life insurance never expires and has a cash value component in addition to the death benefit. You can take a loan on the cash value or use it as collateral during your lifetime. This is why permanent life insurance is considerably more expensive than term life insurance.

Although whole life insurance is often used synonymously with permanent life insurance, whole life, universal life, and variable life are actually types of permanent life insurance. Other permanent life insurance policies are a variation of these three products.

What is variable life insurance?

The big difference between the types of permanent life insurance policies is how they manage the cash value — either in the insurance company’s portfolio, stocks, or options. Variable life insurance’s cash value is invested in the stock market.

Variable life is a type of permanent life insurance that lets you control how your policy’s cash value earns interest. It was created years after universal life for people who didn’t like how whole and universal life how the cash value of their policy was tied to the insurance company’s portfolio. Instead of being invested with the insurance company, the cash value portion of a variable life insurance policy is invested in the stock market. If the market does well, you do well, but if it goes south, so does your cash value.

Mark Williams, CEO of Brokers International, said a variable life policy is akin to a 401(k) in that you can move stocks from sub-accounts to a money market account on a regular basis. However, he said that if the market doesn’t do well this can backfire in later years.

Types of permanent life insuranceBest forWhere is money invested?
Whole lifeGuaranteeing exact same premium for the life of the policyIn your insurance company’s portfolio
Universal lifeThe flexibility to change your premium, death benefit, and cash value over timeIn your insurance company’s portfolio
Guaranteed UniversalFlexibility of a universal life policy with guaranteed rates of whole lifeIn your insurance company’s portfolio
Indexed UniversalLike universal life instead of interest rates in fixed indexed marketFixed index stocks and options
Variable lifeInvesting your cash value in the stock market rather than your insurance companyStock market
Variable universal lifeThe flexibility to change your death benefit, investing in the stock market rather than your insurance companyStock market

You can add riders to your variable life insurance policy

All types of permanent life insurance policies, including variable life insurance, offer optional riders that you can choose to add. This can’t be done with term life insurance policies.

Some riders include:

  • Waiver of premium — allows you to pause your premium payments if you are sick, hurt, or disabled
  • Long-term care — lets you use the policy’s death benefit toward assisted living during your lifetime (such as in-home care or a nursing facility)
  • Family rider — puts the entire family under one policy

Every rider is an additional cost that increases the premium on your policy, and you need to add any riders up front, when you first get your policy.

Quick tip: Before purchasing a life insurance policy, you should speak with a financial advisor — and your account — to make sure it’s providing the benefits and coverage you need.

How to use life insurance cash value

You can use the cash value of a variable life insurance policy during your lifetime, for things such as paying your children’s college tuition, funding a business, or purchasing a second home. Most people use the cash value to fund their retirement — paying themselves a monthly income when they stop working. Due to these features, permanent life insurance can function as an investment and wealth-building tool.

Who needs permanent life insurance?

High-net-worth wealth individuals — those with at least $1 million in liquid assets — often have permanent life insurance policies for tax benefits, endowments, and gifts. The cost is considerably more than term life insurance because permanent life insurance is also a wealth-building tool. And variable life is riskier than other permanent life policies, because it invests in the stock market. 

The average person may not be able to afford a $1 million variable life insurance policy. Think of permanent life insurance coverage amount like equity in a home. You may not be able to get your dream home right off the bat, but you can get a starter home that also builds you wealth. With permanent life insurance, start with a smaller death benefit and increase it over time. And if you can’t afford a permanent life insurance policy, get a term life policy that can be converted to a permanent policy.

Williams also suggests a combination of permanent and term life insurance. For example, if you have $200,000 in permanent life and $300,000 in term for 20 years, at the end of 20 years the term life insurance policy goes away but you still have your $200,000 permanent policy that has earned cash value.

If you’re considering variable life insurance, it’s wise to consult an accountant and financial advisor to determine which policy is best for you and advise you of the tax benefits and implications. It’s worth taking the time to find the best policy for you, because once you’ve signed on the dotted line, it’s a lot more difficult to make changes if you need to adjust your coverage.

Ronda Lee is an associate editor for insurance at Personal Finance Insider covering life, auto, homeowners, and renters insurance for consumers. She is also a licensed attorney who practiced litigation and insurance defense.

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