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Variable life insurance: combination of insurance and investment

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Life insuranceVariable life insurance is a type of life insurance with an investment component. The policy has a cash value account, which is invested in a number of sub-accounts available in the policy. A sub-account acts like a mutual fund, except it’s only available within a variable life insurance policy. The cash value account has the potential to grow as the underlying investments in the policy’s sub-accounts grow. At the same time, though, if and when the underlying investments drop in value, so may the cash value.

The appeal of variable life insurance lies in the investment element available in the policy and the favorable tax treatment of the policy’s cash value growth. Annual growth of the cash value account is not taxable as ordinary income. Moreover, these values can be accessed in later years and, when done properly through loans using the account as collateral, instead of direct withdrawals, they may be received free of any income taxation.

Similar to mutual funds and other types of investments, a variable life insurance policy must be presented with a prospectus detailing all policy charges, fees, and sub-account expenses. Variable life insurance policies are complex, so you should work with a competent adviser whom you trust before purchasing a variable life insurance policy.

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