What is Variable Life Insurance ?
Variable life insurance is a permanent life insurance policy with an investment . The policy has a cash account which is invested in a number of sub-accounts available in the policy. A sub-account acts as same as a mutual fund, except it is only available within a variable life insurance policy. A Policy will have several sub-accounts to choose from, with some offering of different options.
The cash account has the potential to grow as the investments in the policy’s sub-accounts grow – at the same time, as the investments drop, so may the cash value.
Key to Success
The key to variable life insurance lies in the investment options available in the policy and the tax treatment of the policy’s cash growth. Annual growth of the cash account is not taxable as ordinary income. These values can be accessed in later years. If done properly through loans using the account as collateral, instead of direct withdrawals, they may be received free of any income taxation.
Policy prospectus contains details of policy charges, fees and sub-account expenses.
If chosen appropriately, variable life insurance can receive favorable tax treatment and offer the chance to make money in the market and not pay taxes.
Firstly, you have to qualify for a low premium. If the cost of insuring you is too high, it will significantly impact your cash growth.
Secondly, Policy can be a legal security. So like any investment, you have to manage risk and reward, factor in expenses, stay on top of asset allocation and do everything else needed to ensure optimum performance. Make sure you have an adviser if you cannot do it yourself.
You also need to understand how to work within existing tax laws.