Glossary
Variable life insurance, defined
A permanent policy whose cash value is invested in sub-accounts that work like mutual funds, so the account rises and falls with the markets the owner chooses. The death benefit can move with it above a stated floor, and the owner rather than the insurer carries the investment risk.
In practice
Because the cash value is a security, the policy is sold with a prospectus and the agent must hold a securities licence as well as an insurance licence. Fund fees stack on top of the insurance charges, so returns have to clear both before the account grows. A long market fall can leave the account unable to cover the monthly cost of coverage, and the owner must then add premium or the policy lapses. The variable universal form adds flexible premiums to the mix. It suits an owner who wants equity exposure inside a policy and will watch it; it does not suit anyone who wants a predictable cash value.
A worked example
Suppose a buyer directs $300 a month into an equity sub-account inside a policy carrying a $250,000 death benefit. In a year when the sub-account returns 10% the cash value grows well beyond the premiums paid; in a year it falls 20% the account shrinks while the insurance charges continue, and the buyer may be asked to pay more to keep the death benefit. Hypothetical figures.
Applies to: Life Insurance