1. Investment Flexibility
A variable life insurance policy offers greater investment flexibility than a universal life insurance policy. With a variable life policy, policyholders have the ability to invest their premiums in a variety of investment options, such as stocks, bonds and mutual funds. This gives them the potential for higher returns and the ability to tailor their investment strategy to their risk tolerance and financial goals.
In contrast, a universal life policy typically offers a fixed or limited selection of investment options, which may not provide the same level of diversification or growth potential as a variable life policy. The ability to choose from a wide range of investment options in a variable life policy allows policyholders to take advantage of market opportunities and adjust their investments as market conditions change.
2. Cash Value Growth Potential
Variable life insurance policies have the potential for greater cash value growth than universal life insurance policies. The investment component of a variable life policy allows policyholders to allocate a portion of their premiums to investment accounts that can potentially earn returns in excess of the policy’s expenses and mortality charges.
As the investments within the variable life policy grow, the cash value of the policy can increase. This growth potential is particularly beneficial for individuals who have a longer investment horizon and are willing to accept market volatility in exchange for potentially higher returns. In contrast, universal life policies typically offer a fixed or guaranteed minimum interest rate, which may not provide the same growth potential as variable life policies.
3. Death Benefit Flexibility
Variable life policies offer greater death benefit flexibility than universal life policies. With a variable life policy, policyholders have the option of choosing a death benefit that is either level or variable. A level death benefit provides beneficiaries with a fixed payout amount upon the policyholder’s death, while a variable death benefit adjusts based on the performance of the policy’s investment accounts.
This flexibility allows policyholders to tailor their coverage to meet their specific needs. For example, individuals who want to maximize their death benefit can choose a variable death benefit that has the potential to increase over time if the policy’s investments perform well. On the other hand, those who prefer a stable death benefit amount can choose a level death benefit.
4. Potential for wealth accumulation
Variable life insurance policies offer the potential for wealth accumulation beyond the death benefit. The investment component of a variable life policy allows policyholders to accumulate wealth over time that can be used for a variety of purposes during their lifetime, such as funding educational expenses, supplementing retirement income, or leaving a legacy for future generations.
By taking advantage of the potential growth of the policy’s cash value, policyholders can build a substantial asset base that can provide financial security and flexibility in the future. This wealth accumulation feature distinguishes variable life policies from universal life policies, which may focus primarily on providing a death benefit.
5. Estate Planning Benefits
Variable life policies can offer significant estate planning advantages over universal life policies. The potential for wealth accumulation and the ability to adjust the death benefit make variable life policies an attractive tool for individuals who wish to pass their wealth to future generations while minimizing estate taxes.
By using a variable life policy within an irrevocable life insurance trust (ILIT), policy owners can effectively remove the policy’s death benefit from their taxable estate, potentially reducing estate taxes. In addition, the ability to adjust the death benefit allows policyholders to adapt their estate planning strategy as their circumstances change, ensuring that their wealth transfer goals are met.
Overall, variable life policies offer greater investment flexibility, cash value growth potential, death benefit flexibility, wealth accumulation potential, and estate planning benefits than universal life policies. However, it’s important to note that variable life policies also carry higher risks and fees associated with the investment component. Before considering any life insurance policy, it’s important to consult with a financial advisor or insurance professional to determine the best option based on your specific financial situation and goals.
What is the benefit of a variable life policy as compared to a universal life policy?
A variable life policy offers greater investment flexibility compared to a universal life policy. With a variable life policy, the policyholder can allocate their premiums into various investment options, such as stocks, bonds, or mutual funds. This gives them the potential for higher returns based on the performance of their chosen investments.
How does the cash value growth differ between a variable life policy and a universal life policy?
In a variable life policy, the cash value growth is directly linked to the performance of the underlying investments chosen by the policyholder. If the investments perform well, the cash value can grow significantly. In contrast, a universal life policy typically offers a guaranteed minimum interest rate on the cash value, regardless of the performance of the underlying investments.
What level of risk is associated with a variable life policy compared to a universal life policy?
A variable life policy carries a higher level of investment risk compared to a universal life policy. Since the cash value is tied to the performance of the selected investments, there is a possibility of losses if the investments perform poorly. On the other hand, a universal life policy provides more stability as the cash value is not directly linked to the performance of the investments.
Can the death benefit of a variable life policy be adjusted?
Yes, the death benefit of a variable life policy can be adjusted. Policyholders have the flexibility to increase or decrease the death benefit based on their changing needs. However, any adjustments may require the policyholder to undergo a medical examination or provide evidence of insurability.
Are there any tax advantages specific to a variable life policy compared to a universal life policy?
Yes, variable life policies offer potential tax advantages over universal life policies. The cash value growth in a variable life policy is tax-deferred, meaning the policyholder does not have to pay taxes on the investment gains as long as the funds remain within the policy. Additionally, policyholders can access the cash value through policy loans or withdrawals, which may have tax advantages depending on the specific circumstances.