Variable Life Insurance (VLI) allows you to do exactly that by investing your policy’s cash value in various options such as stocks, bonds, and mutual funds, while still maintaining the core life insurance protection.
In this blog, we’ll explore how Variable Life Insurance works, the benefits it offers, and how it can help you invest while keeping you protected. Let’s dive into the features that make VLI a unique and powerful tool for building wealth and securing your family’s future.
What is Variable Life Insurance (VLI)?
Variable Life Insurance is a type of permanent life insurance, which means it provides lifetime coverage as long as you continue to pay your premiums. However, VLI stands out from other permanent life insurance options because it includes a cash value component that you can invest in a range of options.
Unlike traditional policies where the growth of the cash value is predetermined or based on fixed interest rates, VLI allows you to direct the growth of your policy’s cash value by choosing how to invest it. These investments can be in:
- Stocks
- Bonds
- Mutual funds
- Money market funds
This allows for greater flexibility and potential for higher returns compared to traditional life insurance policies, where growth is more predictable and conservative.
How Does Variable Life Insurance Help You Invest?
Variable Life Insurance gives you the unique opportunity to build wealth while being insured. Here’s how it works:
1. Cash Value and Investment Choices
In a Variable Life Insurance policy, part of your premium payment is directed toward the cash value of the policy. This cash value is then invested in the options you choose from a list of available sub-accounts. These sub-accounts may include a variety of equity funds, bond funds, and money market funds.
Since these investments are linked to market performance, the growth of your cash value depends on how well the selected investments perform. This gives you the opportunity to grow your cash value at a faster rate compared to other life insurance policies that offer only guaranteed interest rates.
2. Growth Potential and Flexibility
The main advantage of Variable Life Insurance is the growth potential. If the markets perform well, your cash value can grow significantly. For example:
- Equity funds can provide high returns by investing in stocks.
- Bond funds can offer more stable growth by investing in bonds and other debt instruments.
- Money market funds are typically lower risk but offer more stable, though slower growth.
This flexibility to choose investments based on your risk tolerance allows you to tailor your policy’s growth according to your financial goals. If you’re more risk-averse, you can allocate more funds to bonds or money market options. If you’re looking for higher returns and are willing to take on more risk, you can choose stock-based investments.
3. Managing Risk and Adjusting Investments
One of the significant benefits of Variable Life Insurance is the ability to adjust your investments over time. As your financial goals and risk tolerance change, you can shift your money from one sub-account to another. For example:
- If you see that the stock market is experiencing a downturn, you can move your cash value into more conservative investments like bonds or money market funds to protect your cash value from significant loss.
- If the stock market is performing well, you can increase your allocation to stocks to maximize your returns.
This flexibility gives you more control over the growth of your policy’s cash value, allowing you to manage risk and take advantage of market opportunities as they arise.
4. Tax-Deferred Growth
Another advantage of Variable Life Insurance is that your policy’s cash value grows tax-deferred. This means that you don’t have to pay taxes on the growth of your cash value as long as it stays within the policy. The tax-deferred status allows your money to compound more effectively, helping it grow faster than if it were subject to taxes each year.
Once you begin withdrawing or borrowing from the cash value, you may be subject to taxes, but as long as you leave the money in the policy, you won’t have to pay taxes on the gains.
This makes Variable Life Insurance an effective tool for long-term wealth building, as you can take advantage of tax-deferred compounding.
5. Loan Options Against Your Cash Value
In addition to the ability to grow your wealth, Variable Life Insurance also provides you with the option to borrow against the cash value of your policy. Once your cash value has grown, you can take out a loan with relatively low interest rates. This is particularly useful for:
- Emergencies like medical expenses or home repairs.
- Large purchases such as buying a house or paying for a wedding.
- Supplementing retirement if you need extra funds to live comfortably.
The loan is tax-free, and you don’t have to go through the process of applying for a bank loan. However, if you do not repay the loan, the amount will be deducted from your death benefit when you pass away.
What Are the Risks of Variable Life Insurance?
While Variable Life Insurance offers the opportunity for higher returns, it also comes with some risks:
- Market Risk: Since your cash value is tied to the performance of the market, your policy’s value can go up or down based on the investments you select. If the markets are performing poorly, you might see a decrease in your cash value.
- Investment Fees: Some funds come with management fees that can eat into the overall growth of your policy. It’s important to understand the costs associated with the investments you select.
- Complexity: VLI policies are more complex to manage than other types of life insurance. If you’re not comfortable with managing investments, VLI may not be the best option for you.
For these reasons, Variable Life Insurance is generally better suited for individuals who are comfortable with investment risks and are willing to actively manage their policy’s performance.
Is Variable Life Insurance Right for You?
Variable Life Insurance may be a good choice if:
- You want lifelong coverage combined with the ability to invest your cash value in a variety of options.
- You have a higher risk tolerance and are comfortable with the volatility of the stock market.
- You want to control the growth of your policy’s cash value by choosing the investment options.
- You are looking to build wealth for the long term while also ensuring protection for your family.
Final Thoughts
Variable Life Insurance is a powerful tool for building wealth and protecting your family. It offers the potential for high returns through investments while also providing lifetime coverage. However, it also comes with the responsibility of managing investments and understanding market risks.
If you’re interested in Variable Life Insurance, it’s important to work with a trusted insurance provider who can guide you through the options and help you understand the risks and rewards.
At Oros Life Insurance we are here to help you determine whether Variable Life Insurance is the right fit for your needs. Contact us today to learn more about how you can invest while staying insured.
