When to Use Variable Life and Variable Universal Life Insurance

Variable life products are most suitable for those individuals who want control over their cash values and need or desire increasing life insurance protection. They should have a basic understanding of investments and believe they are capable of making good investment decisions. They must be willing to bear the entire risk of their investments because the insurance company does not guarantee the cash values of VL products. If the policyowner expects the need for death protection to grow, VL death benefit levels will increase with favorable investment experience on the underlying assets. However, policyowners have no assurance that this growth will be consistent. Policyowners face a risk that the market value of the underlying assets and, therefore, the death benefit level, will be depressed when the insured dies.

VUL offers greater certainty of death benefit levels than VL as long as policyowners continue to pay premiums at the level necessary to maintain the death benefit. Under option B, death benefit levels are more certain to increase. VUL also permits the policyowner to increase the face amount of coverage with evidence of insurability.

Given the risks and uncertainties associated with both cash values and death benefit levels, some people may find variable life products an attractive supplement to an existing life insurance plan that assures a minimum required base level of coverage. Generally, VL and VUL are less suitable as the means of providing the minimum basic level of coverage.

VL and, more particularly, VUL are especially suitable for many business insurance needs where flexibility and growth of cash values and death benefits are necessary or attractive features. Businesses can use these policies to provide potentially higher tax-deferred cash value accumulations in nonqualified deferred compensation plans than traditional policies or UL. With successful investment of cash values, the death benefit levels of variable products are more likely than those of traditional products to keep pace with increases in the values of closely-held business interests when a variable product funds a buy-sell agreement. Businesses may also find VL and VUL equally attractive for key person insurance and other business applications or in insured pension plans.

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

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