Is a Variable Life Insurance Policy the Best Investment for You?

by Junior Boomer on January 13, 2010

Is Variable Life Insuarnce Policy The Best For You?
Creative Commons License photo credit: loop_oh

Variable universal life insurance shouldn’t be overlooked or dismissed. Why are there such conflicting opinions over variable universal life insurance policies?. Some financial experts, such as Suze Orman, often did dismiss a variable universal life insurance policy as a poor choice, yet many financial advisors disagree and would tell you Variable Life Insurance is a great option. What gives? And how do you know if variable life insurance is the best investment option is for you?

1. Variable Life Insurance has potential advantages and disadvantages.

In addition to the opportunity for permanent life insurance coverage, the big appeal of VUL is the chance for considerable cash value accumulation. Because of that potential VUL can be a hugely useful retirement planning tool. It can also prove attractive to business owners, parents planning to meet college cost, and high net worth families planning estates. The fees and premiums may be higher than on some other types of life insurance policies.

2. Variable Life Insurance is like other policies

A universal life policy commonly give you flexibility with regards to the premiums and the death benefit. A variable universal life policy offers you that plus a chance to invest in a tax advantage way.

3. Variable Life Insurance gives you control.

VUL policies give you the option of placing some of your insurance savings and investment sub-accounts, often among a range of mutual funds. The investment returns come tax-free. You can also arrange income tax-free withdrawals in loans for the policy’s accumulation account as long as the policy is adequately funded. When stocks do well, VUL policy holders has every reason to smile. There is no ceiling so to speak, limiting the maximum cash value of the policy.

Over time the tax advantage accumulation of the investment portion of the policy may be quite impressive. In a bear market things are different. Poor investment returns of sub-accounts may mean the policy holder has to pay higher premiums to keep the policy adequately funded. If the policy holder can’t do that he or she runs the risk of the policy lapsing. This was the case in 2001 and 2002 when many investors thought their insurance was paid for, but when the sub-accounts drastically declined all of the sudden they had to again make payments on their insurance policy. As you can imagine many investors were not happy.

4. Variable Life Insurance is a long term commitment.

VUL is not for everybody. No single financial or insurance product is. It is a securities product, not a fixed income product. It is usually characterized as a poor choice for the risk averse and for people well into retirement who may not have decades to recover, from the possibility of a bare market. But again it can be a very useful club to have in the bag when it comes to retirement and estate planning. Notably for those in mid-life who are in high tax bracket.

As if or that personal finance expert speaks about VUL on TV, remember that he or she is just issuing her opinion, not financial advice everyone should live by. That pundit does not know you personally or your specific financial situation. In your particular situation and given your particular financial objectives and insurance needs, VUL could be a great option.

5. What to be aware of

If you meet with a financial advisor that is trying to sell you variable life insurance before he truly understands your goals- RUN! Run really fast.  They do not have your best interest at heart.  A VUL policy should only be considered after you’ve funded your employer retiremnt plan and you’ve maxed out your IRA’s.  Only then should you consider a VUL policy.

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