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Variable Life Insurance

If you want the assurance of a death benefit and level (unchanging) premium payments for the life of your policy, coupled with the possibility of enhancing your death benefit through the use of investments, then variable life insurance may be the answer you're looking for. You don't need to worry about monitoring the amount of money in your policy. Your coverage remains in force so long as you pay your premiums. On top of that, you have the chance to build additional benefits in a tax-deferred separate account.

How a variable life insurance policy works

Although other types of whole life and universal life insurance policies offer a (relatively) low return on your cash value account, a policy with a variable account has the potential for greater appreciation. Here's how a variable life insurance policy works: Each time you make a premium payment, the insurance company deducts its sales and administrative expenses related to your policy. The remainder of the money is credited to a cash value account from which the company deducts its monthly costs for insuring your life. Your cash value is placed into an account separate from the insurance company's general account.

You can choose from a variety of accounts known as subaccounts, including stock, bond, and money market accounts, into which to invest your cash value. You may generally allocate your money to as many subaccounts as are in the variable life insurance portfolio, and you may change your allocations at any time without charge, up to certain limits.

Because these subaccounts are securities-based, they have the potential to grow faster than the cash value accounts contained in nonvariable insurance policies. But, of course, with this potential for rapid growth comes greater volatility and the possibility of loss. Growth is not guaranteed, and your cash value will fluctuate on a daily basis. You'll need to pay close attention to the performance of your subaccounts and may wish to consult an investment professional. Also, because the cash value of your variable life insurance policy is regulated as an investment product by the Securities and Exchange Commission, you should receive a prospectus. The prospectus contains detailed information about investment objectives, risks, charges, and expenses, so read it carefully before purchasing a policy.

Risk versus return

Placing your money in any type of securities-based product offers the chance for big gains, but also carries the risk that you may lose your entire principal. The dollar amount of your cash value will fluctuate on a daily basis. Because you control your investments, you must decide how much risk you are able to tolerate before purchasing a variable life insurance policy. But remember, no matter how well or how poorly your subaccounts perform, most variable life contracts are designed so that your level premiums pay for a minimum death benefit equal to the face amount of your policy.

Accessing the money in your policy through loans

As with any type of permanent life insurance, your cash value can be used as collateral to obtain (generally) tax-free loans from your insurance company. If you do take out a loan, that portion of your cash value designated as collateral is transferred to the company's fixed interest account. This is because the chance exists that the balance of your variable subaccounts may fall below the amount of your loan due to market fluctuations. The company charges interest on loans at a rate a few percentage points higher than the return you receive in the fixed account. Consequently, loans have a permanent effect on the performance of the subaccount investment return. At the time of your death, the company will deduct all outstanding loan balances, plus accumulated interest, from the death benefit paid to your beneficiary.

Surrendering your variable life policy

If you no longer need insurance coverage or if you need to access all of the cash values of the policy, you can surrender (cancel) your policy. The company will return your accumulated cash value, minus outstanding loans and interest and any deferred sales charges, known as the surrender charge. Any gain above the premiums (less any dividends received) that you have paid into the policy will be taxed as ordinary income. Keep in mind, however, that surrendering your policy will end your insurance coverage completely.

Buying a variable life policy

Because variable life insurance policies contain portfolios holding stocks, bonds, and other investment instruments, they are regulated as securities. The insurance professionals who sell variable life must be properly registered with the National Association of Securities Dealers, as well as your state's insurance division. As a policyowner, you receive periodic statements of your policy death benefit and cash value amounts, as well as (at least) annual reports describing in detail the composition, performance, and other information regarding the subaccounts and subaccount advisors. If you're uncomfortable with your statements or reports, consult your agent or an investment professional.