I am not a fan of variable life insurance. It sounds good in theory. You have the opportunity to invest the cash value in equities, and you get to choose the allocation. What's not to like?
First, let's look at how the policy works. Actually, there are two types of variable policies. The most common is variable universal life, but there is also a variable life policy that carries a fixed premium, sometimes referred to variable whole life.
In the 1970s, the life insurance industry introduced
insurance (in response to the disintermediation in interest rates), which “unbundled” the life insurance contract. The premium is flexible, and is influenced primarily by interest rates. After the cost of insurance and expenses are deducted from the premium, the balance earns the current declared rate of interest.
The evolution to variable life was simply the option to have the balance invested in mutual fund type investments (called separate accounts).
So why am I not a fan? First, it is extremely labor intensive, as it must be monitored on at least an annual basis. This entails re-projections at various assumed rates of return. If the underlying investments have underperformed the initial assumptions, the premium may have to be increased.
Second, this type of policy carries high expenses, usually the highest of any type of policy. The argument is that the returns will more than offset the high expenses. Obviously, that may or may not prove to be true.
Third, life insurance is supposed to alleviate risk, not create risk, which variable life certainly does.
For these reasons, I believe that variable life is not the product that best addresses permanent life insurance needs.
It works in theory, but then again in theory, communism works.
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