An Introduction to Variable Life Insurance

Variable Life (VL) insurance combines traditional whole life insurance with mutual fund type investments. Basically, it is a whole life policy where the policyowner may direct the investment of cash values among a variety of different investments known as separate accounts or sub-accounts.

VL has a guaranteed minimum face amount and a level premium like traditional whole life insurance, but it differs in three respects:

  1. The policyowner’s funds are placed in separate accounts that are distinct and separate from the company’s general investment fund.

Insurers place policyowner premiums, less an expense or sales load and a mortality charge, into a separate investment account. The policyowner may choose to invest premiums and cash values among several mutual-fund type alternatives, typically including, at a minimum, stock funds, bond funds, and money market funds. Many companies that market VL offer a broader array of investment options such as foreign stock funds, bond funds, GNMA funds, real estate funds, zero-coupon bond funds, and specialized funds such as small capitalization stock funds, market-index funds, and funds that focus on specific sectors of the economy or industries (medical, high tech, gold, leisure, utilities, etc.). Some companies offer a managed fund option where the company’s investment manager assumes the responsibility for allocating investments among the various alternative funds. Some VL policies also offer a guaranteed interest option similar to the declared interest rate on universal life policies. Policyowners typically may switch or rebalance their investments among the funds one or more times per year.

  1. The insurer does not guaranteed a minimum cash value.

The cash value at any point in time is based on the market value of the assets in the separate account. VL policyowners bear all the investment risk associated with the policy.

  1. The death benefit is variable. The face value may increase or decrease (based on a formula that relates the investment performance of the separate accounts to the face value) but not below the guaranteed minimum face amount.

VL has most of the usual features of traditional level premium life insurance including guaranteed maximum mortality charges, nonforfeiture values, a policy loan provision, a reinstatement period, and settlement options.

Also, VL policies may be participating or nonparticipating. In contrast to traditional par policies, dividends paid on par VL policies depend only on possible mortality and expense savings and include no element of excess investment earnings. Excess investment earnings, less an asset management fee, are reflected directly in the value of the separate account.

Similar to other traditional forms of insurance, policyowners may add various options or riders including, particularly, waiver of premium, guaranteed purchase or insurability, and accidental death benefits, as well as others.

Insurers that marketed VL often offered a number of initial premium payment plans including single premium, limited pay (for a specified number of years or until a specified age), and lifetime pay plans.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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