Variable Life Insurance Policy
What it is:
A variable life insurance policy allows the account holder to invest a portion of the premium paid for the policy.
How it works (Example):
Let's say John Doe buys a variable life insurance policy and pays $10,000 a terms of the policy, $5,000 of the $10,000 goes toward the death benefit -- a check for $1 million made out to his wife and children when he dies.in premiums. Under the
The other $5,000 is invested in various instruments -- bonds, mutual , etc. The value of those instruments changes daily (hence the name "variable life insurance policy"). If the value of these securities rises, John can apply those paper profits toward his premiums (which saves him money). Of course, if the don't do well, John still has to pay the full $10,000 premium every .,
If the securities perform really poorly, the insurance company might reduce the value of that $1 million death benefit, though the insurance contract should set forth a minimum death benefit (a "guaranteed death benefit") that his wife and kids receive no matter how poorly the investments perform (though an absolute often means paying extra premiums).
The investments in a variable life insurance policy grow tax-deferred, which means that your returns year. This can significantly boost the amount that accumulates in the accounts.at a higher rate than if you had to pay on the every
Why it Matters:
Variable life insurance policies are regulated as securities, which means your advisor or insurance agent should give you a prospectus that describes the policy in detail, as well as all the options. The important thing about this instrument is that the death benefits and value of the can fluctuate with the . In some cases, the policyholder can borrow against the value of the investments in the account. It is important to that investors should consider the financial stability of the insurer with which they do business; services such as Standard & Poor's and AM Best help.