A variable life insurance policy is a contract between you and an insurance company. It is intended to meet certain insurance needs, investment goals, and tax planning objectives. It is a policy that pays a specified amount to your family or others (your beneficiaries) upon your death. It also has a cash value that varies according to the amount of premiums you pay, the policy’s fees and expenses, and the performance of a menu of investment options—typically mutual funds—offered under the policy. Show
What Should I Do Before I Invest In A Variable Life Insurance Policy?
Remember:
Things to consider:
What If I Change My Mind?You may cancel your policy within a short period (usually lasting at least 10 days) of receiving it without charge. Upon cancellation, you will typically receive a refund of your premiums. The refund may be adjusted up or down to reflect the performance of your investment options. The length of the free look period may vary depending on the state where you signed your application. Tax Rules
How Variable Life Insurance WorksVariable life insurance is a form of life insurance. Like other life insurance, it provides a death benefit that may be significantly larger than the amount of premiums you pay. With a variable life insurance policy, you will be required to pay premiums into an account. The amount of the premium payments that go into the account may be less than you paid because fees were taken out of the premium payments. The money in the account gets invested in a menu of investment options—typically mutual funds— that you can select. In addition, you may be able to allocate part of your premiums to a fixed account. A fixed account, unlike a mutual fund, pays a fixed rate of interest. The insurance company may reset this interest rate periodically, but it will usually provide a guaranteed minimum (e.g., 3% per year). The money in your account will vary according to the amount of premiums you pay, the amount of policy fees and expenses, and the performance of the investment options you choose. Example: You purchase a variable life insurance policy with an initial premium payment of $100,000. You allocate 50% of that payment ($50,000) to a bond fund, and 50% ($50,000) to a stock fund. Over the following year, the stock fund has a 10% return, and the bond fund has a 5% return. At the end of the year, your account has a value of $107,500 ($55,000 in the stock fund and $52,500 in the bond fund), minus fees and expenses (discussed below). Your policy may require you to pay a specified amount of premium payments or provide you the flexibility to pay varying premiums as long as you contribute enough to pay your policy fees and expenses. Some policies may also provide protection from lapse (that is, not having sufficient policy value to pay your policy fees and expenses) if you pay in a certain level of premiums. A policy may lapse if there is not enough cash value (either as a result of policy fees and expenses or poor investment performance or loans) to pay the current policy fees and expenses. The more money you pay in premiums, the lower some of your policy’s fees and expenses may be. This is because your net amount of risk determines some policy fees and expenses. Your net amount of risk is the difference between your policy’s face amount and your policy’s cash value, so it goes down if there is more money in your account. Key Risks of Your Variable Life Insurance Policy
Example: If your policy has a current value of $40,000 and fees and expenses that are $10,000 per year (based on a death benefit of $300,000), your policy may lapse within four years. This could occur sooner due to poor investment performance or if you make a withdrawal or take a policy loan. Positive investment performance and paying additional premiums can reduce the risk of lapse.
The Death Benefit, Policy Loans, and Other Optional Insurance FeaturesThe death benefit is the amount of money your beneficiaries get when you die. When you purchase a policy, you select a “face amount.” This is the amount your death benefit is based on. For instance, a death benefit could be equal to:
You may also be able to purchase additional insurance features that may increase the value of your death benefit. In addition, you may be able to increase your face amount at a later date. Such changes might require another medical examination or other evaluation by the insurance company. Policy Loans. Variable life insurance policies typically permit you to take loans on a portion of the policy’s cash value without incurring surrender charges or paying federal taxes. Policy loans typically have the following effects on your policy:
Other Optional Insurance Features. There are fees and expenses associated with each of these optional features.
Remember:
Variable Life Insurance Fees and ExpensesYou will pay several fees and expenses when you invest in a variable life insurance policy. Be sure you understand all the fees and expenses before you invest. These fees and expenses will reduce the value of your account and may require you to contribute additional premiums to your policy to prevent the policy from terminating. Often, they will include the following:
Other fees and expenses may also apply. You should ask your financial professional to explain to you all charges that may apply. You can also find a description of the fees and expenses in the prospectus for any variable life insurance policy that you are considering. Remember:
Exchanging One Variable Life Insurance Policy For AnotherIf you are considering replacing one life insurance policy for another, here are some things to consider: What is target premium in a universal life policy?The universal life insurance target premium is the amount of premium that is projected to keep the policy in force for the insured's lifetime. There is, however, no explicit guarantee that the universal life insurance policy will remain in force for that period if only target premiums are paid.
Which of the following is correct regarding the target premium in a universal life contract?Which of the following is correct regarding the target premium in a UL contract? It is the suggested amount to be paid on a level basis throughout the contract's duration and the basis for calculating commissions.
What are the two premiums in a universal life insurance policy?Since a universal life insurance policy's premiums are split between the cost of coverage and the cash value, you can choose how much you pay so long as it falls between the minimum and maximum premium amounts.
Which of the following is a characteristic of a universal life insurance policy?Flexibility is a fundamental characteristic of universal life insurance.
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