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Exploring your Investing Options with a Variable Life Insurance Policy

This is a guest post from Ori Tal. Ori writes for the financial blog LifeInsuranceQuotes.net which is a blog that explores personal finances.

Many adults have two primary financial needs: provide protection for their family with life insurance and investing beyond what they are able to contribute to their plans. Thanks to its income tax advantages, variable life insurance policies have become the investment of choice for many savvy adult investors.

Variable life insurance is a form of permanent life insurance that gives permanent protection to the beneficiary once the policyholder passes away. This life insurance policy allows you to allocate a portion of your premium payments to a separate account that contains various investments within the insurance company’s portfolio. These investments may included money market funds, stocks, bonds, equity funds, and so on.

You decide how much of your premium will be invested in different areas of the insurance company’s portfolio. Therefore, since you are determining how your money will be invested and assuming the risks that come along with doing so, variable life insurance policies are considered securities and are sold with a prospectus.

The key benefit of investing in a variable life insurance policy is that it gives you the ability to invest in different types of things without being taxed on your earnings as long as you keep your policy active. Of course, if you cancel the variable life insurance policy, you will be taxed on your earnings.

Furthermore, you are also able to apply the interest you earn on your investments toward your premiums. This means that you can actually lower the amount that you have to pay on your life insurance policy; further saving you money and helping you build your wealth.

The Risks of Investing in a Variable Life Insurance Policy

While variable life insurance policies certainly offer significant advantages for investors, it’s important to note that these policies are not without their risks. Remember, as the policyholder, you are responsible for determining how much of your money will be invested in which areas, so you’re certainly taking risks by doing so.

Investing and SavingBecause there are investment risks, if the investment doesn’t perform well, there will be less money available to pay the policy’s premiums. So, you may have to pay more than you expected or than you can afford to keep your policy active. Additionally, if your investments aren’t performing well, the cash value and death benefit of your policy can decline as well. However, the death benefit will not fall below a pre-defined level.

This means that it is entirely possible that the cash value of your variable life insurance policy could end up being less than what it would be if you had chosen a traditional whole-life policy. If your variable policy isn’t performing well, it will be a very expensive form of life insurance. Of course, if the investments are performing well, it can increase the death benefit far above the guaranteed value and create a good cash value for your policy.

It’s also important to know that it takes a lot of time to accumulate good cash values with these policies as the early premiums often go toward administrative fees and agent commissions.

As with all investments, you need to explore all of your options, watch their performance closely, and always make sure you read the prospectus carefully.


Editorial note: I came across whole life insurance policy in regards to “Infinite Banking” strategy. I briefly wrote about the strategy here. You can use life insurance as described above and have a portion of the account invested in more aggressive assets. It takes time to build self sustained account, usually 5 years, but after that period you can use the Infinite banking” strategy to work for you. I personally do not like the part of insurance policy behind the strategy, but I was able to find a few investors out there who use this strategy successfully. All you need to do when choosing the policy is to make sure you have the one which allows you to take a loan from the policy. Then you can become a banker to yourself.

Image courtesy of Vichaya Kiatying-Angsulee & David Castillo Dominici / FreeDigitalPhotos.net


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