Variable appreciable life insurance is a form of whole life insurance that offers you the ability to invest a portion of your premium dollars in mutual fund investments. This type of life insurance provides some guarantees but also comes with certain risks that you should be aware of before investing in the policy.
The purpose of variable appreciable life insurance is to provide life insurance death benefits and a cash value savings account along with the policy. The death benefit may not be used under normal circumstances during your lifetime, but the cash value account provides a way for you to indirectly access a portion of the death benefit through policy loans. The policy effectively combines elements of investing and elements of traditional insurance into one financial product.
A variable life insurance policy offers fixed premium payments and sometimes offers a guaranteed minimum death benefit as well as a cash value savings amount. A portion of your premium dollars may go toward mutual fund investments. Any amount directed toward these investments is not guaranteed. As the cash value savings starts to grow, it builds up against the value of the death benefit, effectively replacing it with the cash reserve amount. The cash value amount is projected to be equal the death benefit when you are age 100. When this happens, the policy is fully matured.
When there is "gap," or difference, between the cash value of the policy and the death benefit payable under the policy, this difference is the "net amount at risk" since it represents an amount of money that the insurer needs to pay with money that the policy has not yet earned. This "net amount at risk" starts out as large when you first buy your variable life insurance policy. Over time, it decreases as the cash value increases. When the "net amount at risk" is gone (when the cash value of the policy equals the death benefit), then you are self-insured. This means that the insurance company does not have any risk in paying the death benefit amount to you since you have earned a savings equal to the death benefit of the contract. The contract terminates (at your age 100) and the insurer will either pay the cash value/death benefit amount to you or you may leave it with the insurer until your death.
The benefit of variable appreciable life insurance is that all cash in the policy is exempt from income tax. Additionally, any money you borrow from the policy is income-tax free and does not need to be repaid during your lifetime as long as the policy remains in force. You choose how your premium dollars are invested, and you may use the cash value to supplement your retirement income through policy loans.
The disadvantage to variable appreciable life insurance is that the policy cash values are not guaranteed to the extent that they are invested in mutual funds. Your policy may decrease in value due to poorly performing investments. If this happens, you may end up with less death benefit and cash value than if you had purchased an ordinary whole life insurance policy.
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- "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007
- "Life & Health Insurance, License Exam Manual, 6th Edition"; Dearborn Financial; 2004