The most commonly sold form of variable life is variable universal life insurance. It works similarly to universal life except that the cash value accumulation depends on the performance of the underlying investments, or sub-accounts, that you choose, rather than on a current interest rate. Sub-accounts are owned by the policyholder and not tied to the investment portfolio of the life insurance company. The company generally offers you a choice of stock and bond accounts, and a guaranteed* investment account. These types of policies shift the investment burden from the company to you.
IMPORTANT NOTE: This is an investment-oriented product. Your death benefit is based on the performance of the underlying investments. If your investments do poorly, you run the risk that your death benefit will be reduced and the policy could possibly lapse. To protect yourself against this danger, companies offer riders to guarantee the death benefit regardless of investment performance. These riders may substantially add to the cost of what a regular universal life policy would cost.
Advantages of Variable Universal Life over Other Forms of Cash-Value Insurance
Disadvantages of Variable Universal Life over Other Forms of Cash-Value Insurance
IMPORTANT NOTE: Your sub account performance is based on the portion of your premium that goes into your sub account after the insurance company deducts mortality charges, contract, and administrative charges, including taxes and risk guarantees. If the fund returned 6% last year, your real rate of return on your contributions will be considerably less. Typically, agents can illustrate these policies using annual interest assumptions up to 12%. If an insurance agent shows you a variable life illustration, use a more conservative rate.
*Guarantees are made by the claims paying ability of the insurance company.
SUGGESTION: If you're not an investor and conservative by nature, and concerned that your heirs will have the right amount of money when you're no longer here, don't gamble on a variable death benefit. When might you consider this type of policy? After you have fully funded your retirement plans, have a solid base of term insurance, and plan on holding the policy for a very long time, at least 20 years.
IMPORTANT NOTE: Variable Life Insurance must be sold with a prospectus. It is an investment product and comes under the scrutiny of the Securities and Exchange Commission. Make sure that your agent is a registered representative and he or she provides you with a prospectus.