Variable life insurance is a type of insurance . It provides a death benefit, which is similar to other types of life insurance. This may be substantially higher than the premiums you pay.
You will need to pay premiums to an account if you have a variable-life insurance policy. Because premium payments were deducted from premium payments, the amount of premium payments that are paid into the account might be lower than what you actually paid. You can choose from a variety of investment options, which include mutual funds.
You may also be able to transfer a portion of your premiums into a fixed account. A fixed account pays a fixed interest rate, which is not the case with mutual funds. Although the insurance company might reset this interest rate occasionally, it will generally provide a minimum guarantee ( , e.g., 3%) per year.
Your account’s balance will depend on the premiums you pay and the policy fees and expenses you incur.
An example: A variable life insurance policy is purchased with a premium payment of $100,000. 50% of the initial premium payment ($50,000), is allocated to a bond fund and 50% ($50,000), to a stock funds. The stock fund will earn a 10% return while the bond fund will earn a 5% return over the next year. Your account is worth $107,500 at the end of the year ($55,000 for the stock fund, $52,500 for the bond fund), minus any fees or expenses (described below).
You may be required to pay a certain amount of premium payment, or you can choose to pay different premiums so long as you contribute enough money to cover your policy fees and expenses.
If you pay a certain amount of premiums, some policies may offer protection against lapse (i.e. not having enough policy value to cover your policy fees and expenses). If there is insufficient cash value, either due to policy fees and expenses, poor investment performance, loans or policy fees, the policy could be canceled.
Your policy fees and expenses will be lower if you pay more premiums. Your net level of risk will determine policy fees and expenses. Your net amount is the difference between your policy face amount and cash value. If you have more money, it will go down.
Key Risiken of Your Variable Life Insurance Policy
- This is not a short-term saving vehicle. Variable life insurance policies are designed to provide a death benefit and to meet long-term financial goals.
- Your policy could be cancelled. This means that your policy will cease to be valid and your beneficiary will no longer receive any death benefits. Many life insurance policies are cancelled.
Example: A policy with a current value $40,000 and fees or expenses of $10,000 per annum (based on a death benefit $300,000) could be canceled within four years. You may notice this sooner if your investment performance is poor or if you withdraw from the policy or borrow money. A positive investment record and additional premiums may reduce the chance of lapse.
- Policy expenses and fees. These fees and expenses can be substantial. These fees can include premium deductions, surrender charges, as well as significant ongoing fees and expenses that are associated with owning a policy.
- Loss of capital.
- There are risks associated with investing options
- Performance of the investment options will determine the value and return of your investment.
- Every underlying fund has its own risks. Before making any investment decisions, you should carefully read the prospectus for each investment option. Before making an investment decision, you should carefully consider the prospectus for each option. This includes the fund’s investment goals and policies, management fees, expenses, risks, volatility, and whether it contributes to diversifying your overall investment portfolio.
- Insurance company risk. All guarantees, including the death benefit, are backed by the financial strength of the insurance agency that issued the policy. In the event that an insurance company is in financial trouble, it might not be able meet its obligations.
Death Benefit, Policy loans, and other optional insurance features
The death benefits are the funds that your beneficiaries will receive when you pass away. You choose a face amount when you buy a policy. This is the amount that your death benefit is calculated on. A death benefit might be equivalent to:
- The face amount
- The face amount plus cash value;
- The face amount and the premium payments that you have contributed to your policy.
An example: A variable life insurance policy was purchased at $100,000 premiums and is now worth $150,000 due to market performance. Depending on the option you chose, your death benefit might be $1,000,000 if the policy’s face value is $1,000,000- Based on your face amount: 1,000,000.
- Based on your account’s cash value plus your face amount: $1,150,000 (1,000,000 + $150,000).
- Based on your face amount and your premium payments: $1.100,000 ($1,000,000 + 100,000)
Additional insurance features may be available that could increase your death benefit’s value. You may also be able to increase the face amount later. These changes may require another medical exam or evaluation by your insurance company.
Policy loans. Variable insurance policies usually allow you to borrow a portion of your policy’s cash value, without having to pay surrender fees or federal taxes. The following are common effects of policy loans:
- They will reduce the cash value of your policy.
- They could reduce your death benefit.
- They increase the chance that your policy will be cancelled by reducing its cash value.
- Policy loans, unlike withdrawals, are not usually considered taxable events. If your policy is terminated with outstanding loans, the loan could be treated as a withdrawal for federal tax purposes.
- They are not usually subject to surrender fees.
- The amount borrowed will usually be subject to interest.
- They can be repaid without deducting a sales fee.
Additional Insurance Features. Each of these features may have fees or expenses.
- No lapse–keeps you policy in force if your account value is not sufficient to pay your policy’s fees. These features might not be available for certain years or if certain premiums have been paid. A no-lapse option may reduce your death benefit significantly if you are elected.
- Disability rider – Keeps your policy in effect if you are disabled and can’t pay your policy fees.
- Accelerated Death Benefit–pays part of your death benefit while still alive, if you are terminally or chronically ill.
- Long-term Care Insurance–provides coverage to cover the costs of long-term healthcare.
- Income benefit –provides minimum monthly income for you and your beneficiaries for a specific period.
- Additional term life insurance–This option allows you to purchase additional term insurance for your family or yourself as part of your variable-life insurance policy. Term insurance is a type of life insurance that provides a set amount for a specific period.
- Accidental Death Benefit–Provides additional death benefits in the event of your death from an accident.