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Variable Life Insurance Policy

What is a 'Variable Life Insurance Policy'

A variable life insurance policy is a form of permanent life insurance. Variable life insurance provides permanent protection to the beneficiary upon the death of the policyholder. This type of insurance is generally more expensive than term insurance because it allows the insured to allocate a portion of the premium dollars to a separate account comprised of various instruments and investment funds within the insurance company's portfolio, such as stocks, bonds, equity funds, money market funds and bond funds.

Explaining 'Variable Life Insurance Policy'

Because of investment risks, variable policies are considered securities contracts and are regulated under the federal securities laws; therefore, they must be sold via a prospectus. As a securities product, fund performance may lead to declining cash value or death benefit over time.

Variable Life Insurance Flexibility

One of the aspects of variable life insurance that makes it stand out among other permanent life insurance policies is the flexibility it provides policyholders in terms of premiums paid and cash value accumulation. Premiums paid to a variable life insurance policy are not fixed as they are with traditional whole life insurance or term insurance. Instead, they can be shifted up or down over time, within certain limits, based on the insured's needs. For example, an insured with a variable life insurance policy may decide to reduce monthly premium payments from $100 to $50 because a major expense may have impeded cash flow for a period of time. The cash value within the policy can be used to make up the shortage in premium payments during the time lower premium payments are made. When cash flow returns to a comfortable level, the insured has the option to increase premiums back to the initial $100 per month.

Downsides of Variable Life Insurance

Unlike fixed life insurance products, variable life insurance may require policyholders to add premiums over time to ensure the death benefit remains guaranteed to a certain age. Paying more than the minimum cost of insurance for a variable life insurance policy is one method to ensure guarantees remain intact. Additionally, investment risks within the cash value of a variable life insurance policy fall completely on the policyholder, not the insurance company. As such, there are no guarantees as to how well the cash value may perform over time, making it difficult to plan for using accumulated earnings in the future. Like most life insurance policies, individuals are required to undergo full medical underwriting to obtain a variable life insurance policy.


Further Reading


Economic, demographic, and institutional determinants of life insurance consumption across countries
academic.oup.com [PDF]
… Risk is only variable that is significant at 5% level among all the other control variables (size, profitability … This indicates that in order to fulfill the claims of the life insurance policyholder at the time of death or expiry of the policy, risky companies acquires external funds …

Life insurance markets in developing countriesLife insurance markets in developing countries
www.jstor.org [PDF]
… Risk is only variable that is significant at 5% level among all the other control variables (size, profitability … This indicates that in order to fulfill the claims of the life insurance policyholder at the time of death or expiry of the policy, risky companies acquires external funds …

How does the development of the life insurance market affect economic growth? Some international evidenceHow does the development of the life insurance market affect economic growth? Some international evidence
onlinelibrary.wiley.com [PDF]
… Risk is only variable that is significant at 5% level among all the other control variables (size, profitability … This indicates that in order to fulfill the claims of the life insurance policyholder at the time of death or expiry of the policy, risky companies acquires external funds …

An international analysis of life insurance demandAn international analysis of life insurance demand
www.jstor.org [PDF]
… Risk is only variable that is significant at 5% level among all the other control variables (size, profitability … This indicates that in order to fulfill the claims of the life insurance policyholder at the time of death or expiry of the policy, risky companies acquires external funds …

Causal relation between life insurance funds and economic growth: evidence from MalaysiaCausal relation between life insurance funds and economic growth: evidence from Malaysia
www.jstor.org [PDF]
… Risk is only variable that is significant at 5% level among all the other control variables (size, profitability … This indicates that in order to fulfill the claims of the life insurance policyholder at the time of death or expiry of the policy, risky companies acquires external funds …

The financial performance of life insurance companies in GhanaThe financial performance of life insurance companies in Ghana
www.emerald.com [PDF]
… Risk is only variable that is significant at 5% level among all the other control variables (size, profitability … This indicates that in order to fulfill the claims of the life insurance policyholder at the time of death or expiry of the policy, risky companies acquires external funds …

Pricing of unit-linked life insurance policiesPricing of unit-linked life insurance policies
www.tandfonline.com [PDF]
… Risk is only variable that is significant at 5% level among all the other control variables (size, profitability … This indicates that in order to fulfill the claims of the life insurance policyholder at the time of death or expiry of the policy, risky companies acquires external funds …



Q&A About Variable Life Insurance Policy


What are some advantages of variable life policies over traditional whole-life policies and term policies?

One advantage of variable life policies over traditional whole-life policies and term insurances is that they offer flexibility in premium payments.

How does variable life insurance differ from term insurance?

Variable life insurance provides permanent protection to the beneficiary upon the death of the policyholder, while term insurances only provide temporary coverage for a specified period.

How can premiums be shifted up or down with a variable policy?

Premiums can be shifted up or down within certain limits based on the insured's needs. For example, an insured with a variable policy may decide to reduce monthly premium payments from $1,000 to $500 because a major expense has impeded cash flow for a period of time. The cash value within the policy can be used to make up the shortage in premium payments during this time when lower premium payments are made. When cash flow returns to comfortable level, he/she has the option to increase premiums back to initial $1,000 per month.

Are there any drawbacks associated with variable policies compared with fixed ones?

Yes; one drawback is that you must pay more than minimum cost of insurance if you want guarantees remain intact .

What is variable life insurance?

Variable life insurance is a form of permanent life insurance.

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