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VARIABLE LIFE 

INSURANCE

Variable Life Insurance

Variable life insurance is similar to whole life insurance in that they both have a cash value, but the functions of the cash values are quite different. 

With a whole life insurance policy, the cash value component is a savings account. That’s why, although the growth might be small compared to other investment options, there is a guaranteed minimum rate. It also includes dividend payments from the life insurance company.

A variable life insurance cash value is more akin to investing. The money paid into it goes into a series of mutual fund-like sub-accounts where you can get some decent growth, but you can also lose money depending on the market. The cash value is more or less placed in the stock market.

While this makes variable life insurance policies a better investment option than whole life insurance policies — the potential for higher, tax-deferred growth makes it a "super-IRA" — you can only invest in the sub-accounts available through your policy. That means you don’t get to choose from the wide variety of mutual funds that are available on the open market.

While fees can be lower with a variable life insurance policy than a whole life policy, the product is riskier. Why? The same reason investing in stocks is risky: Most people don’t know much about the stock market and don’t know enough to make changes in their investment. There’s too much management for the average person to do it effectively.

All of this makes a variable life insurance policy both a limited investment option and a limited life insurance option. As an investment vehicle, variable life insurance policies provide tax-free money to beneficiaries during the time that the policyholder is alive. Once that person dies, however, that money is retained by the insurance company. A variable policy can help cover funeral and end-of-life expenses, but other — and potentially simpler — policies do as well.