How is does variable life insurance work?

by hirby

Not to be a jerk, but that financial advisor is an idiot. Actually, he’s not an idiot, he’s trying to make bunch of money by selling you a life insurance policy. I guarantee you he doesn’t own a variable life policy. Maybe he doesn’t have life insurance at all.

This is how a variable life policy work. You pay your premiums. A portion of your premiums goes toward life insurance and the rest is invested in the stock market. There is no guarantees that your cash value will grow. Investments by themselves have their own operating and management fees. Life insurance has its own fees as well. Now you combine these two products together, you are now paying bunch of fees!

If your cash value does grow and you die someday, your beneficiary will be paid a death benefit that is almost equal to the growth of the cash value. If your cash value does poorly, you are guaranteed a minimum death benefit of what you paid for.

If you ever wanted to take money out, you would have to borrow it and pay a loan interest on it. You will affect the death benefit above the guaranteed minimum. If you cancel the policy in the future, surrender charges will apply on the cash value.

I have seen many life policies and I have never seen a life insurance policy getting a great return on the cash value. The highest rate of return I ever saw was 6%. Most of the time, its between 2% to 4%.

If you want life insurance because you have a family that is dependent on your income, get a 20-35 year term insurance. If you want to save for retirement, open a Roth IRA (if you qualify for it). If you have a job that has a 401(k), I would put money into that too. If you put the same investment in a life insurance policy and in an IRA account, the IRA will out perform the life insurance policy.

Anyway, you are making the right choice by considering an IRA. Don’t listen to agent or advisor or anyone who recommends life insurance as a retirement vehicle. Life insurance main purpose is to provide income to your beneficiary so that he/she can maintain the same life style. (though, many people who own life insurance don’t have enough coverage)

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