Life Insurance 201 "Variable Life Insurance"

    Hello Web Land... its been awhile. My apologies, you know that life in the way thing. Here we are again taking a look at the different types of life insurance. If you missed the last posting, we covered the pros and cons of Whole Life Insurance. Please take the time to review it as we will expand and build upon it through this post. So just some background info on Variable Life Insurance... well Variable policies became popular in the early 80's and 90's with the growth of the stock market. As many Whole Life owners saw, the guaranteed growth was being way out performed by the stock market and they wanted to get a little of that. So the insurance industry "gave" them what they wanted.
     The idea is to improve on the shortcomings of a whole life policy in terms of investment return. I have heard it called the "ultimate" combination of insurance and investments. The reality of it is that by combining the two ends up in also adding the worst of both worlds. You still get many of the benefits of a whole life policy, ability to borrow money "tax-free", tax-free death benefit... things we covered on the previous posting. You also have the potential to outperform a whole life policy by picking investments that the insurance company offers within its portfolio. Sounds great..... doesn't it? Take a look at this image and realize what happens to your money...

    Well lets look at the down side of things.. Like we spoke of before, by combining life insurance and investments the companies will make a lot of money by adding much bigger administration charges and other fees. That will greatly reduce the amount you are actually able to place towards the investment portion. While at times for high networth clients this type of policy may be useful, the problem comes when insurance salesmen let what they get paid influence what they will push a client towards. Like all insurance salesman, they get paid off of commission. In a variable policy they typically receive 50-100% of the first years premium and depending on how much they were able to talk you into... that could be well into the thousands of dollars. Plus up to 6% of the premium going to them yearly after that. To some, I do stress some, this is too tempting an offer to pass up as an insurance salesman might fall into pushing this regardless of needs. They may also state that the 6% doesn't come from your money, but from the insurance company... lol lets be real.. where does the insurance get the money... from you.
    They also tend to be expensive and what ends up happening is that the amount of insurance coverage takes a big hit. So instead of receiving proper protection, clients end up with half the coverage but double the cost of other less expensive options. Take a look at a prospectus of a very common type of policy sold by Prudential (http://vpx.newriver.com/getcont.asp?doctype=pros&clientid=prucovpx&fundid=74429E818). This is a prospectus from the 80's that I found online, but what is troubling is the 3 pages of expenses that are on there. The more complex things and policies get, the harder it is for the everyday person to understand it is. The cost per thousand on insurance is also much higher than whole life and term life. It also increases as age goes on and depending on the investment option, your cash value can drop or disappear depending on the investment type you choose.  You see you should have insurance guarantee the cost of insurance so it doesn't become unaffordable later on in life when your family needs it if something happens to you. If the investment portion of the policy does bad, it can actually decrease your death benefit in some policies. They do have options to keep that from happening but it cost of course. Also like a whole life policy, your beneficiaries must pick between the death benefit and the cash value. They can get both but with an added increase in payments.
    If you are one of the few people that find out you don't like the variable policy that your in, you have the option of surrendering and getting any of the cash value out. Well depending on the surrender charges they might be huge.. we have seen some that might make you think its not much... it will say 9%. problem is it will also state that its 9% of the total premiums paid for the first 5 years.... that can be a huge chunk, if not all, of the cash value. The investment funds that are offered are also limited, usually to no more than 15-20 which would be sufficient if they were funds that could compete with other mutual funds that are offered with streight investment companies. Thats usually plenty but while investment companies must always keep performance high to keep customers, insurance companies do not have any incentive to keep returns high as they get most their money from fees and administration cost.
    Like most things, the idea of having the cash value increase with investments is a good one. Unfortunately, they have over complicated it and over "fee'd" it to the point of uselessness for the greater population. Unless you have massive amounts of money to drop into it and can afford huge premiums, this will end up damaging your financial future when it eats up your cash value because of increasing premium, any money you may have put in is gone. Then heaven forbid the market does turn south and you end up with no cash value and no insurance do to cancellation. In my opinion a Variable Life policy 9/10 times is a waste of time, money and more importantly a rip off for customers.