If you’re considering Variable Life Insurance (VLI), you’re not alone. It’s a popular choice for those who want lifetime coverage while also having the chance to grow wealth through investments. But with the potential for high returns comes the need to carefully navigate the complex world of investments and life insurance.
In this blog, we’ll walk you through some common mistakes people make when purchasing or managing Variable Life Insurance and how you can avoid them. Let’s make sure you get the best out of your policy without unnecessary surprises down the road.
What Is Variable Life Insurance?
Variable Life Insurance is a type of permanent life insurance that offers both life coverage and an investment element. A portion of your premium goes toward the cost of insurance, while the rest is invested in various market-based accounts such as stocks, bonds, or mutual funds. These investments grow (or lose) based on how the markets perform.
Key Features:
- Flexible premiums: You can adjust how much you pay into your policy depending on your financial situation.
- Cash value growth: Your premiums are invested in a variety of options that can grow your policy’s cash value.
- Adjustable death benefit: You can change the death benefit as your needs evolve.
- Tax-deferred growth: The cash value grows tax-deferred, meaning you don’t pay taxes on it until you withdraw it.
Common Mistakes to Avoid with Variable Life Insurance
1. Ignoring the Risks of the Investments
Variable Life Insurance gives you the ability to invest your cash value in the market, but many people forget that these investments come with risks. While the potential for higher returns is an attractive feature, there is always the possibility that the market could underperform, and your cash value might not grow as expected.
Why It’s a Problem:
- If the investments tied to your policy aren’t performing well, you might face the reality of needing to pay higher premiums or even lose coverage if the cash value isn’t sufficient to cover your insurance costs.
- Market fluctuations can have a direct impact on your financial future, which is why it’s crucial to understand what you’re investing in and how it might affect your policy.
How to Avoid This Mistake:
- Diversify your investments: Just like with any investment strategy, consider spreading your cash value across a variety of asset classes (stocks, bonds, money market funds) to balance risk and potential returns.
- Review your policy regularly: Make it a habit to check how your investments are performing and adjust your allocations if necessary. Don’t leave it up to chance.
2. Underestimating the Costs and Fees
Like many financial products, Variable Life Insurance comes with a variety of fees and costs that can eat into your cash value and limit your overall returns. These include administrative fees, cost of insurance, and investment management fees for the funds you choose. If you’re not aware of these costs upfront, they can surprise you later.
Why It’s a Problem:
- Over time, these fees can significantly reduce the growth of your cash value. While the policy may offer high returns, the fees you pay could negate some of the potential gains, making your policy less effective than you expected.
- If the costs are too high, you could find yourself paying for coverage you don’t need or can’t afford.
How to Avoid This Mistake:
- Understand the fees: Before committing to any Variable Life Insurance policy, ask your agent to clearly explain all the fees involved, including administrative costs, insurance costs, and any investment fees.
- Compare policies: Not all VLI policies are the same. Be sure to shop around and compare the costs and benefits to find the best policy for your needs.
3. Forgetting to Monitor Your Policy’s Performance
One of the biggest mistakes people make with Variable Life Insurance is treating it like a “set-it-and-forget-it” product. The cash value of your policy depends on the performance of your investments, which can change over time. If you’re not actively monitoring your policy, you might miss signs that you need to reallocate your investments or adjust your premiums.
Why It’s a Problem:
- Market fluctuations can cause your investments to perform well one year and poorly the next. If you’re not regularly reviewing your policy, you might miss opportunities to rebalance your portfolio and avoid underperforming investments.
- If your policy’s cash value falls below what’s required to cover the cost of insurance, you could face a policy lapse or be forced to pay higher premiums to maintain coverage.
How to Avoid This Mistake:
- Schedule regular check-ups: Make it a priority to review your policy’s performance at least once a year. Many insurance companies offer online portals to track performance, making it easy to stay on top of your policy’s cash value and investment performance.
- Work with a financial advisor: A professional can help you navigate the complexities of the market and recommend adjustments to your policy’s investments when needed.
4. Not Fully Understanding the Impact of Loans and Withdrawals
One of the benefits of Variable Life Insurance is the ability to borrow against or withdraw the cash value. However, many people don’t fully understand how taking loans or withdrawals affects their policy.
Why It’s a Problem:
- Loans and withdrawals reduce the cash value and could impact your death benefit. If you take out a loan and don’t repay it, the amount will be subtracted from your death benefit when you pass away.
- Depending on the size of the loan, your death benefit could be significantly reduced, leaving your beneficiaries with less than they expected.
How to Avoid This Mistake:
- Understand loan terms: Before taking out a loan against your policy’s cash value, ensure you understand the terms, such as interest rates, repayment schedules, and the impact on your death benefit.
- Withdraw carefully: Before making a withdrawal from your policy, think about the long-term impact on your coverage and policy performance.
5. Ignoring the Long-Term Sustainability of the Policy
While Variable Life Insurance offers flexibility in terms of premiums and investments, it also requires careful attention to long-term sustainability. As you age, the cost of insurance may increase, and if your cash value isn’t growing quickly enough, you may be forced to pay higher premiums to keep the policy in force.
Why It’s a Problem:
- Without proper management, your policy could lapse or become unaffordable. This is particularly concerning for those who rely on VLI for lifetime coverage and long-term wealth-building.
- If your policy lapses, you lose both coverage and the accumulated cash value, which can be devastating.
How to Avoid This Mistake:
- Plan for the future: As you get older, make sure you’re accounting for the increased cost of insurance and that your cash value is growing enough to cover premiums. Speak with your insurer regularly to ensure your policy remains sustainable.
- Adjust your premiums: If necessary, increase premiums early in the policy’s life to build more cash value for future years.
Conclusion
Variable Life Insurance is a powerful tool that combines permanent coverage with the ability to grow wealth through market-based investments. However, it’s not without its risks, and there are several common mistakes to avoid when managing your policy.
By understanding the risks of investments, fees, loan impacts, and long-term sustainability, you can make the most of your Variable Life Insurance policy and ensure it meets your long-term financial goals.
At Oros Life Insurance, we are committed to helping you navigate the complexities of Variable Life Insurance. Whether you’re just starting your policy or looking to make adjustments, our team of experts is here to guide you every step of the way.
Ready to Maximize Your Variable Life Insurance?
Contact Oros Life Insurance today to learn more about how Variable Life Insurance can fit into your long-term financial strategy and how we can help you avoid costly mistakes.
