Variable Life Insurance: such policies allow portion of the premiums to be allocated to the invest company’s investment fund allowing your beneficiaries to receive tax free profits. In this kind of policy, the bulk of your premium is invested in one or more than one separate accounts.
You have the option of selecting from a wide range of investment alternatives such as: mutual funds, bonds, stocks, money market funds etc. The interest that you earn on these accounts in turn increases your account’s cash value. You have the option of switching from one investment alternative to another – depending on your insurance policy’s rules. Normally, issuers have investment managers who supervise their investments. In this way, the investment risk can be reduced but not totally eliminated.
The Risk: This policy is very risky because your benefits depend on the success of your investment portfolio. Therefore, if your investments perform well and give you a good return then your cash payments and death benefits will increase. However, if your investment portfolio does not perform as well as you expected, then your cash benefits and death benefits will decrease.
Variable life insurance policy does offer a guaranteed death benefit – which will not decrease even if your assets in your investment portfolios decrease significantly. However to avail this, you will have to pay extra premiums.
Also with this, you never know whether or not you will actually receive any cash at all because poor investment decisions can eliminate your entire cash value. Just like with whole life policies, you can borrow against your cash values.
Term Life Insurance: Term life insurance is so called because it is for a specific ‘term’ – this could be 1, 5, 10, 15 or 20 years. It also sometimes referred to as ‘temporary’ insurance. If death occurs during the time of the term, then a cash payment is made to beneficiary. If death occurs after the specified term period, then no cash payments are made out to the beneficiary. Also, once the term is over and the policy is not renewed, the coverage ceases.
Term life insurance covers you for a certain amount of time – the term. Term life insurance is much cheaper than variable life insurance. . It allows you to buy large face amounts with very little money. You are fully covered for the term or tenure that you take out the policy for – but you do not receive any cash payments after the policy is over.
The best thing about this type of life insurance is that there are no risks. Because there is no investment factor, term life insurance offers no major risks like variable life insurance. It is also easy enough to understand without any major complications. If you do not possess any complicated understanding of investment tools, then you should not opt for variable life but for term life insurance to avoid any financial instability.