One kind of life insurance that increases in value is variable universal life insurance, or VUL for short. Similar to mutual funds, the cash value of a VUL can be invested in a wide range of distinct accounts, with the contract owner having complete discretion over which account to utilize. The name 'variable' refers to this feature of being able to invest in different accounts with varying values since the accounts are invested in the stock and/or bond markets.
The term 'universal' in the name alludes to the owner's flexibility in paying premiums. The monthly premiums for life insurance can range from zero to the maximum amounts specified by the Internal Revenue Code. In contrast, whole life insurance has set premiums that are usually non-refundable and must be paid on time to avoid the policy lapse (however there is an option to use an Automatic Premium Loan or give up dividends to cover whole life premiums).
History of Variable Life Insurance
Variable life insurance traces its origins to the mid-20th century when insurance companies sought to innovate traditional life insurance products. Introduced in the 1950s, variable life insurance aimed to provide policyholders with greater control and potential for investment growth by linking policy cash values to investment portfolios, typically composed of stocks, bonds, and mutual funds.
Distinguishing Variable Life Insurance from Term and Whole Life Insurance
Term Life Insurance: Term life insurance provides coverage for a specific period, such as 10, 20, or 30 years. It offers straightforward protection with fixed premiums and a death benefit payable to beneficiaries if the insured passes away during the term. However, it does not accumulate cash value, making it a pure insurance product without investment components.
Whole Life Insurance: Whole life insurance offers lifelong coverage with fixed premiums and a guaranteed death benefit. It also accumulates cash value over time, which grows at a predetermined rate and can be accessed through policy loans or withdrawals. Whole life insurance provides stability and cash value growth but may have higher premiums compared to term life insurance.
Variable Life Insurance: Variable life insurance combines elements of life insurance and investment. It allows policyholders to allocate a portion of premiums to investment accounts, offering the potential for cash value growth based on the performance of underlying investment options. Variable life insurance offers flexibility and potential for higher returns but also entails investment risks and higher costs compared to term and whole life insurance.
Considerations for Suitability
Determining the suitability of variable life insurance involves evaluating individual financial goals, risk tolerance, and long-term objectives. Variable life insurance may be suitable for,
Individuals seeking life insurance protection with the potential for cash value growth.
Investors comfortable with market fluctuations and willing to assume investment risk.
High-income earners looking for tax-deferred investment opportunities.
Those with long-term financial planning needs who can afford higher premiums and are willing to commit to the policy for the duration.
However, variable life insurance may not be suitable for everyone, especially those seeking low-cost insurance protection without investment components or individuals with conservative investment preferences.
Variable life insurance represents a dynamic option in the realm of life insurance, offering both protection and investment potential. Understanding its historical evolution, distinguishing features compared to term and whole life insurance, and considering individual financial circumstances are essential steps in determining its suitability for achieving long-term financial goals and objectives.
