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As educated consumers demanded life insurance products that would also serve as investment vehicles that could deliver aggressive earnings, the insurance industry responded with Variable Life Insurance.

The conservative interest earned in the typical Whole Life or Universal Life products simply did not meet the needs of many consumers who were unwilling to wait the many years required to grow the cash accounts within the policies. Thus, Variable life was introduced, and consumers flocked to these new products promising more aggressive returns on their investment.


How it Works

Each time a premium payment is made, the insurance company deducts the sales and administrative expenses, and the balance of the premium is credited to a cash value account where the actual cost of insurance is deducted. The balance of the remaining premium is then placed into sub-accounts based on your preference. The sub-accounts include stocks, bonds, and money-market products that are securities-based and have the potential to grow significantly faster than the fixed life products. Although there is the potential for rapid growth, there is also the potential for loss. This loss potential makes it critically important to seek advice and direction from an investment professional.


Return versus Risk

Purchasing a variable life insurance product is very similar to any other securities base investment. The cash account of your policy will fluctuate on a daily basis as the markets fluctuate, and there is the possibility of losing the entire principal. Since the insured controls the investment, it is important to determine in advance of the purchase how much risk you are willing to tolerate. The good news is that with most policies being offered, the cost of insurance is deducted before money is invested into the sub-accounts that guarantees that the death benefit will be there when needed.


Accessing Your Cash

Similar to fixed life insurance, you can access your cash value to collateralize tax-free loans from the insurance company. When a loan is taken, the loan amount being collateralized is transferred to a fixed account to prevent the chance of your sub-accounts from falling below the loan amount due to fluctuations in the market.

The company will charge you interest on the loan that amounts to a few points higher that the fixed interest account that will have a permanent effect on the interest earned in the sub-accounts. If you should die before repaying the loan, the insurer will simply deduct the balance of the loan plus any interest due from the death benefit.


Surrendering the Policy

If the insured decides that he or she no longer needs the insurance or wants to access all available cash in the policy, a policy surrender will be in order. By surrendering the policy, the company will refund all cash accumulated less any outstanding loans, interest due, and surrender charges. The insured will then have a tax liability for any funds over the amount of premiums paid into the policy.

Keep in mind that variable life insurance products are considered securities and as such are regulated by the Securities and Exchange Commission. The insured will receive a prospectus just as if they were purchasing any stock market product. Insurance and financial professionals who sell variable life products must also be registered with the National Association of Securities Dealers and the state department of insurance.