Variable life insurance: Is it right for you?

Ever wonder where your money goes when you pay your life insurance premium? With variable life insurance, you don’t have to.

Variable life insurance policies are a type of permanent life insurance plan that lets you decide how your premiums get invested. Generally, you’ll have dozens of investment options to choose from that can help grow the cash value faster than it would otherwise. As your policy grows in cash value, you earn more tax-deferred interest and even dividends on that money to reinvest into your account.

On the other hand, you always run the risk of losing money on your investments, which will eat into your plan’s cash value and possible death benefits in the future.

Benefits of a variable life insurance policy

Variable life insurance policies allow you to grow your wealth much faster through a wide range of investment options. You can choose to put a portion of your premiums toward stocks, money markets, or bonds where they can grow in value.

You can also choose a level death benefit option or a death benefit with cash value. A level death benefit is stated on your policy document and will never change. A death benefit with cash value includes the death benefit plus the accumulated cash value of your account if your investments perform well.

As your cash value grows and you make more money on interest and dividends, you can reduce your premium payments.

You can also access the money in your account in the form of a loan if you need more money later in life, though it may affect your future benefits. You won’t have to pay federal taxes on these policy loans, but you may have to pay interest and borrowing does increase the risk that your policy will lapse due to insufficient funds.

Cons of a variable life insurance policy

Variable life insurance policies tend to be more expensive than other whole life insurance and term life insurance plans due to the various service fees required to manage your account, so these insurance policies should only be used as a long-term investment strategy.

Since you’re putting money into the stock market, there is the risk that your investments will lose value. That means your death benefit and your plan’s cash value will decrease.

Some policies have safeguards in place to make sure your death beneficiaries still receive a guaranteed death benefit if your investments lose value.

If you want your beneficiaries to receive the cash value of your policy, plus the death benefit, you’ll likely have to pay a higher premium.

There are often fees taken out of your premium payments before they’re deposited into your account to pay your investment manager and cover your basic insurance costs. Make sure you know all of the fees and charges before committing to a variable life insurance plan.