Variable life insurance is a permanent life insurance plan with separate accounts that include various instruments and investment funds such as stocks, bonds, equity funds, money market funds, and bond funds.
Due to investment risks, variable policies are classified as securities contracts and are regulated under federal securities laws.
There are three main components to a variable life insurance policy:
- Death benefit: what is left to the policyholder’s beneficiaries after his death
- Premium: the amount to be paid for a contract of insurance
- Cash Value: the sum of money that builds inside of a permanent life insurance policy
A share of every premium payment goes toward the cost of insurance and insurer's charges, which help keep the death benefit in place. The remaining premium is applied to the policy's cash value.
One of the features that sets aside Variable Life insurance from traditional whole life insurance or term insurance policies is its flexibility. Within limits, policyholders may adjust their premium payments according to their needs and investment goals. However, compared to other life insurance policies, variable life insurance is more expensive. Furthermore, the policyholder is fully responsible for any investment risks as the insurer provides no performance guarantees and does not cover investment losses. Therefore, the policyholder must conduct due care by staying informed about investments and monitoring the performance of the separate account.
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