Variable life insurance is a versatile financial tool combining life insurance coverage with an investment component. It allows policyholders to secure their loved ones' financial future while potentially growing their wealth. For insurance and wealth management advisors, having a solid understanding of variable life insurance is crucial to assist clients in making informed financial decisions.
Variable life insurance is a form of permanent life insurance that offers a death benefit and cash value component. What distinguishes it from other types of life insurance is the investment component. Policyholders can allocate their premiums into various investment options, usually in sub-accounts resembling mutual funds. This unique feature offers the potential for the cash value to grow over time.
Unlike other types of life insurance, where the cash value might grow at a predetermined interest rate, variable life insurance allows policyholders to invest in the stock and bond markets. These investments are typically offered through sub-accounts within the policy. As a result, the cash value's growth is tied to the performance of these investments.
This feature offers policyholders the potential for higher returns than traditional life insurance, such as whole life or universal life. However, it also introduces investment risk, and the policy's value can fluctuate as the markets change. Wealth management advisors should guide their clients in choosing the appropriate investment options, ensuring they align with their risk tolerance and long-term financial objectives.
As with other forms of life insurance, variable life has several tax advantages. The cash value within the policy grows on a tax-deferred basis, and policyholders can access the cash value through tax-free loans and withdrawals. This makes variable life insurance an attractive option for retirement income planning, particularly for clients who have reached contribution limits on other tax-advantaged accounts like Roth IRAs and 401(k)s.
Another attractive feature of variable life insurance is its flexibility. Policyholders can often adjust their premium payments and death benefits to accommodate changes in their financial circumstances and long-term goals. For example, a client might choose to overpay or max fund the policy during their working years and then reduce their premium payments upon retirement. This adaptability ensures that the policy remains relevant as clients' situations evolve.
While variable life insurance offers the potential for higher returns, it's important to make clients aware of the associated risks. Market volatility can impact the cash value within the policy, which may lead to fluctuations in the death benefit and the policy's overall value. If the market experiences too many down years, especially in succession, it can severely impact the policy and even cause a premature lapse in some cases. Clients should understand that the performance of their investments can vary and may not experience consistent, guaranteed growth.
An ideal client profile for variable life insurance typically includes individuals or families who meet specific financial and life-stage criteria. Here are some key characteristics and considerations for identifying potential ideal clients for variable life insurance:
Wealth management advisors must conduct thorough financial assessments and have in-depth discussions with potential clients to determine if variable life insurance aligns with their financial goals and risk tolerance. Since variable life insurance is a complex financial product, clients should fully understand how it works and what it can offer before committing to a policy.
In a rapidly evolving financial landscape, variable life insurance stands out as a versatile solution that, when used wisely, offers both security and the potential for substantial wealth accumulation. With the right guidance from knowledgeable advisors, clients can harness the benefits of variable life insurance to achieve their long-term financial objectives.
A tech-enabled brokerage like Modern Life can help advisors ensure clients have the coverage they need. Here's how:
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