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Variable Life Insurance

One of the more popular forms of life insurance out there is variable life insurance. But why is this complex form of life insurance gaining such popularity, and how can it benefit your financial foundation?

Understanding Variable Life Insurance

Variable life insurance is a form of whole (or permanent) life insurance. That means that once you have had a policy approved and issued it will offer you insurance benefits for your entire life as long as you pay the premiums in full and on time. Even if your health starts to take a downturn or your weight increases, no changes will occur within your policy.

When you pay premiums for variable life insurance, you are not just paying for the cost of insurance but also for the “cash value” which is the portion of the premium that accumulates within the policy to offer a pool of funds that can increase your death benefit, provide tax free loans, give you a value should you decide to terminate the policy and create a reserve pool of funds to pay your premiums.

The Variable Portion

The aspect that makes variable policies actually variable is the subaccounts that the cash accumulation portion of your premiums are invested in. These subaccounts are similar to mutual funds in that they are created by a group of investments, like stocks, that can provide a return on the funds that are deposited into them.

To understand this, think of your premium as serving two purposes. Part of it serves the purpose of paying for your actual cost of insurance-the actual death benefit that the life insurance policy provides. The cost of this benefit depends on your age and health when you buy the policy because they are directly related to your risk.

The second portion of your premium is applied to the cash accumulation (or cash value) in your policy. These funds are invested in the stock market by way of the subaccounts you choose and they value can increase or decrease depending on the performance of the underlying assets within the subaccounts.

This is what makes a variable life insurance policy both risky and rewarding. The subaccounts offer more risk than a fixed return would, but they also offer the opportunity for much more return-just as actually investing in the stock market could. But more importantly, no matter how poorly your subaccount investment return is, you will always have the death benefit as long as you pay your premium in full and on time.

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