Variable Life Insurance

The big bang with variable life insurance products, including variable universal life insurance, is that the policyowner has the opportunity to achieve huge gains in the cash value and those gains are tax free to the beneficiary.

A variable life insurance policy differs from a whole life policy in four main respects:

• a new concept, the ‘separate account’ is presented;
  
• the policyowner assumes the risk for the performance of the policy;
  
• a minimum guaranteed death benefit is provided based on an ‘assumed rate of interest’; and,
  
• the product is a security which adds significant new rules and regulations.
  
  

In a whole life insurance context, the insurance company places the premium payment into the company’s general account which it uses to earn income to feed back to the policies as interest. By establishing a guaranteed interest rate of return, the insurance company can calculate the amount of premiums required to achieve some agreed upon end point.
As in a whole life insurance policy, the policyowner in a variable life insurance policy is required to pay a set premium on a scheduled basis. In the variable life insurance context, however, the insurance company places the premium payment into a separate account specific to the policyholder and the policyholder has the responsibility of directing the performance (i.e. investments) of that account.
The insurance policy will provide a minimum guaranteed death benefit as agreed to by the insurance company and the policyholder and the funding of the death benefit will be determined by using an ‘assumed rate of interest’, which is usually around 4%. If the performance of the separate account exceeds the assumed rate of interest, the death benefit increases accordingly. Should the separate account performance be less than the assumed rate, for example less than 4% for a given year, the death benefit would drop from the previous year. However, the death benefit will never drop below the guaranteed face amount.
The separate account can invest in common stock, bonds, money-market instruments or other securities to achieve potentially higher gains than a fixed interest rate. Thus, the term ‘variable’ life insurance. As the markets move up and down, the separate account values (i.e. the cash value) will move accordingly.
Since the variable life insurance products switches the investment risk from the insurance company to the policyowner, these types of policies are considered both insurance contracts and securities and are regulated by both the Securities & Exchange Commission and the state insurance commissioner. An agent authorized to sell variable life insurance must be licensed by the state as well as by the National Association of Securities Dealers (NASD) as a registered representative.
As a security, variable insurance products are regulated by the Securities & Exchange Commission which brings out a new set of agent requirements dealing, primarily with full and fair disclosure laws. For example, any sales presentation must be preceded by or accompanied by a prospectus approved by the SEC. All materials used in selling and promoting these products must also be approved prior to use by the SEC.
Loans are also available through the variable life insurance policy; however, the amount of the loan is limited because of the volatility of the separate account. Normally, only 70 to 80% of the cash value is allowed to be borrowed.

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This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. Consult your financial or tax advisor for specific questions. For information about your specific insurance needs or situation, contact your insurance agent. Before investing, understand that variable annuities, mutual funds and variable life insurance products are subject to market risk, including possible loss of principle. All individuals selling variable annuities and variable life insurance products must be licensed insurance agents and registered representatives. Variable life products allow the contract holder to choose and appropriate amount of life insurance protection that has an additional cost associated with it. Our articles are intended to assist in educating you about insurance generally, but they cannot provide personal advice. They may not take into account your personal characteristics, such as budget, assets, risk tolerance, family situation or activities, etc. which may affect the type and amount of insurance that would be right for you. In addition, state insurance laws and insurance company underwriting rules may affect available coverage and it costs. If you need more information or would like personal advice, you should contact an insurance professional.