Life insurance policies are of two kinds - a) Whole life plans and b) Term plans. The former is a cover for the rest of your life, while the latter is for a fixed term, which could be five years, ten years, or even thirty years. For both kinds of policies, you have to pay a premium regularly, as stipulated by the insurance company. The frequency can be monthly, quarterly, or yearly.
In case of a whole life plan, when the insured expires, his family then gets the assured amount as per the policy. They are absolutely risk-free investments and that's why many people invest in them as part of their retirement financial planning. However, for people who want the benefits of a life cover, and at the same time, want to increase their earnings, there are the variable life insurance policies. Let's find out whether you should invest in them or not.
About the Policy
This insurance cover offers the same financial security to the beneficiaries of the policyholder as any other policy would, the only difference is that it comes with an investment option. Similar to a whole life plan, it provides you coverage till the time of your death. When you invest in this policy, a separate account, also known as a cash value account, is opened, in which a part of your premium is pooled.
The premiums collected over time, as well as the interests earned in this account can be used by the policyholder to invest in bonds, equities, stocks, or any other investment option, which the insurance company is offering. The death benefit which your beneficiaries will get as well as the cash value of this account may thus vary in accordance with how your investments are performing. So, if your investments stand good, you can actually get a substantial return through this insurance policy.
Advantages and Disadvantages
The biggest advantage of this policy is that the cash value account can be accessed by the insured anytime to pay his premiums. Another benefit is that you do not need to pay yearly taxes on this cash value account. Only when the policy is surrendered, the amount is taxable and needs to be paid.
The biggest drawback is that if the investments do not perform well, the policyholder can incur losses. This reduces the death benefit as well as the amount of money in the cash value account. Thus, this insurance cover does not offer the same kind of security as other kinds of policies. In case of a loss, the insured may actually need to pay more premium to keep the policy in force.
Another drawback of this policy is that a person cannot withdraw from the cash value account during his lifetime. Lastly, this plan is costlier than all other kinds of insurance plans, due to the investment component involved.
While purchasing this policy, a person should look at his financial goals and then take a decision with regards to the kind of cover he wants to opt for. If you are looking for financial security and a fixed death benefit, then variable life insurance is not for you. However, if you are ready to take a risk anticipating high returns, this is exactly what you need.