Is variable universal life insurance right for you?
Purchasing life insurance is a major decision. Before signing on the dotted line, you want to be sure that you are selecting the right policy for you and your family. For many, permanent life insurance offers peace of mind. Your policy can never be cancelled so long as you make premium payments.
In today's market, there are several types of permanent life insurance options available. These include whole life insurance, universal life insurance and variable life insurance. Each has benefits. If you plan on paying for college or the future purchase of a house, for example, variable universal life insurance may be the type of policy best suited to your needs.
How variable universal life insurance policies work
Variable universal life insurance policies combine life insurance and tax-deferred investment. It offers generally greater earning potential than whole life insurance policies. Variable universal life policies work by depositing your premium payments into an investment account. Depending on the policy, funds can be invested in stocks, bonds or mutual funds. The cost of insurance, account fees and other expenses are withdrawn from the account by the life insurance company. Gains in the investment portion of the policy are allowed to appreciate on a tax-deferred basis.
If your investments perform well, you might actually be able to one day stop making premium payments. On the flip side, if your investments do poorly, you may have to increase your premiums to keep the policy in force.
Variable universal life insurance, do you homework
Variable universal life insurance policies have few guarantees. There is no guaranteed return on your investment. There is no guaranteed cash value. And, if you allow the policy to lapse, there is no death benefit.
Because of the risk involved, variable universal life insurance plans are sold through a prospectus. This document details, among other things, how the cost of insurance is calculated, administrative fees charged by the company and the policy's investment options. It is important to carefully review the prospectus before purchasing variable universal life insurance.
4 attributes of an ideal variable life insurance policy owner
So who should purchase variable universal life insurance? According to Kiplinger's Personal Finance, the best candidates for these plans have these attributes:
- Can tolerate investment risk
- Will not need to withdraw money for at least 10 years
- Plan to leave the plan in force for the duration of their life
- Have maxed out other tax-deferred investment options and are in a high tax bracket
While variable universal life policies are not as cheap as term life insurance, they do make sense for those with big expenses looming down the road. Investing in a policy now can allow your money to grow tax-free and be ready when you need it for college costs, a new home purchase, business expenses or retirement.
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