Variable whole life insurance is a type of permanent life insurance and is very similar to whole life insurance. Here’s everything you need to know about it to determine if it’s the right choice for you.
What Is Variable Whole Life Insurance?
Variable whole life insurance is a type of insurance that provides coverage for your entire life. In the event of your death, your beneficiary or beneficiaries will receive a death benefit, that is, a lump sum of money that’s tax-free.
This insurance also has a savings component called cash value, which you can increase by investing in particular securities, such as bonds, stocks, equities, or money market mutual funds. That would also potentially increase your death benefit.
How Does Variable Whole Life Insurance Work?
Once you choose the coverage amount for your variable whole life insurance policy, you can decide how you want to provide the premiums – annually, semi-annually, quarterly, or monthly.
As long as you provide all the premiums on time and in full, the policy will provide your beneficiaries with a tax-deferred death benefit.
With every premium, your cash value has the potential to grow. A particular portion of each premium will go into a sub-account of your policy, making up your investor funds.
So, instead of earning a fixed interest to increase your cash value and death benefit, the growth of your cash value will depend on the performance of your investments.
That means that growing the savings component is far from guaranteed. Your investments may not perform well; so, you might decrease your cash value and death benefit.
Also, investing in securities comes with a fixed interest investment and many different management fees. Your maximum return rate would also probably have a cap.
Depending on the insurance company and the variable whole life insurance policy they offer, your death benefit may be safe to a certain extent. There may be a certain minimum level below which the benefit wouldn’t fall.
Be that as it may, investing your cash value into any kind of security comes with a risk. Make sure you thoroughly discuss the options with your insurance company to fully understand the risks before investing anything or choosing this kind of insurance.
Whole Life Insurance vs. Variable Whole Life Insurance
As already mentioned, whole life insurance and variable whole life insurance are very similar. Let’s see where they meet and where they divert from one another.
Both of these insurance types provide lifetime coverage, which means you can’t outlive either of the policies.
Both whole life insurance and variable whole life insurance provide a guaranteed death benefit. That means that your beneficiary or beneficiaries will receive the payout amount upon your death, as long as you provide all the premiums.
The premiums of both policies are fixed, so you don’t have to worry about paying more as you get older or as market conditions change.
This is where the policies differ. With whole life insurance, you have a guaranteed cash value. With every premium you provide, your cash value grows.
As you accumulate more equity over time, you may be able to withdraw some of the funds or take out a loan against the policy. You wouldn’t decrease your death benefit by withdrawing the funds, but you would in case of borrowing them and not paying back what you owe.
With a variable whole life insurance policy, your cash value isn’t guaranteed. You have different investment options to choose from to potentially increase the cash value, but that comes with a risk. If your investments don’t bode well, the cash value may decrease, along with your death benefit.
Variable Whole Life Insurance with Melton McFadden
At Melton McFadden Agency, we offer the best variable whole life insurance plans in Michigan. If you’re interested in buying a variable whole life insurance policy in Michigan, don’t hesitate to reach out.
We can help you choose the right insurance for your needs to make the best decision for your family’s financial future. Contact us today to get a quote.