Variable Life: Dividends and Market Participation

If you are a risk taker, are familiar with securities and other variable funds, you might consider variable life insurance. Variable life insurance is similar to universal life in that it has two parts, the life insurance portion and an investment or savings portion. However, unlike universal which has a "safe" savings account portion that will continue to grow as long as the Cost of Insurance does not exceed your premium, the investment portion of variable life is invested in the market.
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Finding a company that offers variable life can be a challenge as such products are considered securities and require an agent with a Federally accepted securities license, something the average life insurance agent and even many senior financial advisors do not have. Furthermore, when you find a company, you want to thoroughly check out their financial status, their previous record of gains and losses and their policies on individual accounts. For example, some companies do not monitor individual accounts unless you have over $500,000 invested. Lesser amounts are traded in blocks. Unless you have the time and the know-how to personally choose and monitor your investments, you want to make sure you have a broker-agent who will know where your money is at all times and will make appropriate moves in a down market.

Your investment money can be invested in stocks, bonds, money market funds, real estate funds, mutual funds, or anything the company invests in. Usually, you will not choose a single security for your investment, but will instead allocate percentages of your investment to the categories available through the company. For example, you might have 50% of your investment in Global Equities, 25% in bonds and the remaining 25% in a money market. As things change on the economic scene, you can move those percentages around. If something happens that could cause a dramatic down turn in the economy—such as the recession of 2001-2002—you can tell the company to move all of your funds to money market. You don't gain much interest there, but you don't lose either.

The advantage of using this type of insurance is that your beneficiary will receive the actual account value if it is more than the death benefit. If your account value drops due to a down turn in the market, you will still have a floor below which your death benefit will not go. You should be aware, however, that while it is possible for a growing investment to fund your life insurance—making premium payments unnecessary after a period of time—you can also lose significantly in a down market. If there is not enough money in the investment portion of your account to fund the life insurance, you may have to increase your premium (making it less affordable) to keep your minimum death benefit.

Variable Life is definitely not for everyone. Most people do not have the time to monitor the funds themselves and make changes in time to take advantage of changes in the market—which can happen overnight. Even if you have an excellent broker-agent, the company can not give you an iron clad guarantee against occasional loss. The hope is that, with a skilled and experienced company, the gains will outweigh the losses. However, if you do not understand the fluid nature of securities, you should stay away from Variable Life as it will cause you unnecessary frustration.

Another disadvantage to Variable Life is that, no matter how much it grows, you cannot take money out of it while you are living without paying taxes on that money. For that reason as well as for the added flexibility and security of universal life, many companies no longer offer it.

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