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Variable Appreciable Life Insurance popularly known asVariable Life Insurance is designed to provide stable security to yourimmediate beneficiary after your death. The life insurance policy in thiscategory is termed "variable" as you can allocate a portion of yourpremium dollars to a separate account in various investment funds within the insurancecompany's portfolio. These may be an equity fund, a money market fund, a bondfund, or some combination thereof. However, it is to be noted that the value ofthe death benefit and the cash value may fluctuate with the performance of thisinvestment portion of the policy.
It is also true that though most variable life insurancepolicies guarantee that the death benefit will not fall below a specifiedminimum, it does not guarantee a minimum cash value. Variable is a form ofwhole life insurance and due to investment risks it is considered a securitiescontract. The Variable Life Insurance is regulated as securities and comesunder the purview of the Federal Securities Laws. It is therefore mandatory tosell the policy with a detailed prospectus.
Pros:
With the Variable Life Insurance policy you can participatein various types of investment options without having to pay tax on yourearnings. You can further enjoy this benefit as long as you do not surrenderthe policy. Moreover, you can also apply interest earned on these investmentstoward the premiums, thus lowering the amount you pay.
Cons:
Your investments are often at stake. With poor investmentfunds performance, you end with less money to pay the premiums, which in turnmean that you may have to pay more than you can afford to keep the policy inforce. Poor fund performance also means that the cash and/or death benefit maydecline, though never below a defined level. And above all even in dire needs,you cannot withdraw from the cash value during your lifetime.
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One can invest in any number of opportunities with a variable life insurance plan. In essence, the insured is able to control the investment of the policy's cash value instead of relying upon the pre-established rate of return provided in a whole life solution. This makes variable life insurance very attractive to those who believe the rates of return offered by more traditional insurance policies can be easily outstripped with superior investment strategies.
However, variable life insurance policies carry with them a level of risk directly proportional to the skill of the investor and the quality of his or her decisions. Although variable policies create an opportunity for tremendous growth, they also allow a market decline to decimate the cash value of the policy. Fortunately, there is some safety net, as variable life policies will retain a death benefit that will not fall below the amount of insurance initially purchased. As such, even an errant investor cannot decimate the true insurance value of the policy, even though he or she may do tremendous harm to its cash value.
Absent consideration of the investment component, variable life policies are quite similar to whole life policies. In both cases, death benefits remain fixed, regular premiums are fixed and the insured can borrow against the cash value of the policy. Also, in both policy types the cash value accumulated by the policy is tax-deferred. The investment component inherent in variable life insurance policies requires they be considered a security by the federal government and a prospectus is issued for all variable life insurance policies. This "security" labeling does not significantly alter the behavior of the plan when compared to other insurance plans, however.
Variable policies provide an opportunity to retain appropriate levels of death benefits while having the simultaneous opportunity to invest premiums on one's own in hopes of generating a higher cash value for the policy. This creates a tremendous potential upside for variable life insurance policies, but also opens the door for potential losses in cash value depending on investment performance. Although one will not see a change in death benefits if investments fail to adequately perform, they will see a decline in cash value that can significantly reduce the policy's utility as a source of supplemental retirement income or as a means of handling financial emergency.
Alternatively, a savvy investor can use a variable life policy to create a sizeable retirement nest egg while deferring taxes until dispersal. Successful investment can produce a cash value for the policy that could conceivably dwarf the value of whole life policies. The flexibility of variable life insurance plans and the possibility of generating significant cash value gains makes them a very popular life insurance for those with the skills or insight to invest wisely.