Basics
A variable life insurance policy uses a portion of the premiums paid on the account as investments. The policy carries a predetermined death benefit like other life insurance policies, but carries risk as to the cash value of the policy based on the performance of the investments that the carrier purchases with the funds. Investments made with variable life insurance funds go into the insurance company's portfolio and can range from government bonds to money market accounts and international equity accounts, report financial consultants at Life Insurance.net . Investment management fees and operating fees are paid out of the funds allocated for investment as well. Separate accounts created with the premiums are formed and either managed by the insurance company itself or contracted out to an investment company.
Tax Advantages
Gains that are made from the investment of variable life insurance funds provide no taxable income for the bearer of the insurance, reports James H. Hunt, F.S.A. for Consumer Fed.org. Instead, additional insurance is purchased as the cash value of the policy increases. Once the policy is cashed in, much of the gain in value is mitigated by the depreciable cost of the insurance. In most circumstances, if the policy is held until the insured dies, the total amount of the policy payout, including any gains from investments, are not taxable. At the same time, sales of insurance are taxed up to 3 percent by state and federal bodies, which sometimes mitigates the perceived tax advantages and can take years, and a number of good investments, to overcome.
Process
The first premium paid on a variable life insurance account activates the policy with a death benefit purchased by the insured that takes affect immediately. Monthly premiums are paid to keep the insurance policy active. A percentage of the premium is taken up front to cover taxes, management expenses and sales commissions. These upfront fees are referred to as "loads," and can run as high as 11 percent of the premium. The rest of the premium is allocated to various investment accounts that the insured has chosen. The accounts are assessed with daily management fees. Administration costs are deducted from the accounts monthly and typically run between $5 and $10. The value of the policy changes daily as the market moves up and down. The insured can surrender the policy at any time and must pay a surrender charge that is usually stipulated in the initial contract. The surrender charge may be in effect for up to 20 years and covers the proposed additional costs incurred by the insurer for managing the policy.
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