Variable life lets you invest part of your cash value in stocks and other securities, through mutual funds run by the insurance company. With a variable-life policy, both the death benefit and the cash value depend on the performance of the investments you choose, which can go down as well as up. There is no guaranteed minimum interest rate for the cash value, as there is with a straight universal-life policy.
You decide how much of your net premium -- that is, the amount left after commissions and other expenses are paid -- will be invested in different areas: stocks, bonds and short-term money-market funds. (Policyholders' investment funds are segregated from the insurance company's general accounts so that they reflect the actual experience of the investments chosen.) Because you decide where your money is invested and bear the risk of those investments, variable life is considered a security and is the only kind of life insurance sold by prospectus.
No guaranteed cash value
A minimum death benefit -- the policy's face amount -- is guaranteed, but your cash value is not. If your investments perform poorly over a long time, it's possible your policy could end up with a cash value smaller than what you would have achieved with a traditional whole-life policy. A poorly performing policy would represent an extremely expensive form of life insurance if you died after paying premiums for many years. On the other hand, good performance in the investment account could increase the death benefit above the guaranteed level or create a substantial cash value.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Details of variable-life policies are spelled out in their prospectuses, which you can get from the agent or the company. This is a complex product, so read the prospectus carefully. The first year's premium is largely consumed by one-time administrative costs and the agent's commission. Thus, it takes several years to accumulate significant cash values even if the investment portion of the policy does well. Also, a variable-life policy must be watched closely after you buy it. It will be up to you to change your investments to get the best return.
-
Is Your Social Security Earnings Record Wrong? Here's How to Fix ItYour Social Security benefits are based on your Social Security earnings record. It's important to review your records to avoid having your benefits reduced.
-
Stock Market Today: Markets Discount Another U.S. DowngradeAfter Friday's closing bell, Moody's followed Standard & Poor's and Fitch and cut its rating on U.S. government debt.
-
AI Goes To SchoolThe Kiplinger Letter Artificial intelligence is rapidly heading to K-12 classrooms nationwide. Expect tech companies to cash in on the fast-emerging trend.
-
What To Know if You’re in the Market for a New Car This YearThe Kiplinger Letter Buying a new car will get a little easier, but don’t expect many deals.
-
Will Lower Mortgage Rates Bring Relief to the Housing Market?The Kiplinger Letter As mortgage rates slowly come down here's what to expect in the housing market over the next year or so.
-
Car Prices Are Finally Coming DownThe Kiplinger Letter For the first time in years, it may be possible to snag a good deal on a new car.
-
New Graduates Navigate a Challenging Labor MarketThe Kiplinger Letter Things are getting tough for new graduates. Job offers are drying up and the jobless rate is increasing. Are internships the answer?
-
When's the Best Time to Buy a Domestic Flight? The Kiplinger LetterThe Kiplinger Letter A new study by CheapAir.com has crunched the numbers.
-
Woes Continue for Banking Sector: The Kiplinger LetterThe Kiplinger Letter Regional bank stocks were hammered recently after news of New York Community Bank’s big fourth-quarter loss.
-
Anxious Flyers Take Note: The Kiplinger LetterThe Kiplinger Letter Whether it's the routes to avoid that have the most turbulence or the safest airline, we've got you covered.
