Variable Annuity Life Insurance: How It Works and When to Consider It

If you are looking for a life insurance policy, you might have come across a type of insurance called variable annuity life insurance. In this article, we will explore what this type of life insurance is and how it works. We will also discuss the pros and cons of variable annuity life insurance and provide answers to some frequently asked questions.

What is Variable Annuity Life Insurance?

Variable annuity life insurance is a type of life insurance policy that combines life insurance coverage with an investment component. With this type of policy, part of your premium payments are invested in a variety of funds, such as stocks, bonds, and money market funds. The performance of these funds determines the value of your policy’s cash account.

Unlike traditional life insurance policies, which pay out a fixed death benefit, variable annuity life insurance policies pay out a death benefit that is tied to the value of the cash account. This means that if the value of the cash account is high at the time of your death, the death benefit payout will be higher. Similarly, if the cash account value is low, the death benefit payout will be lower.

How Does Variable Annuity Life Insurance Work?

Variable annuity life insurance works by combining two separate components: life insurance and an investment account. Here’s how it works:

Step 1: Choose a Death Benefit

The first step in getting a variable annuity life insurance policy is to choose a death benefit amount. This is the amount of money that will be paid out to your beneficiaries when you pass away. The death benefit can be a fixed amount or tied to the value of the cash account.

Step 2: Choose an Investment Strategy

Once you have chosen your death benefit, it’s time to choose an investment strategy. With variable annuity life insurance, you have the option to invest in a variety of funds, such as stocks, bonds, and money market funds. You can choose to allocate your premium payments to one or more of these funds, depending on your investment goals and risk tolerance.

Step 3: Pay Premiums

As with any life insurance policy, you will need to make premium payments to keep your variable annuity life insurance policy in force. Part of your premium payments will go towards paying for the life insurance coverage, while the other part will be invested in the funds you have chosen.

Step 4: Monitor Your Investment Account

Once you have started investing in the funds, you will need to monitor your investment account regularly. The value of your account will fluctuate based on market conditions and the performance of the funds you have invested in. It’s important to keep an eye on your account to ensure that it is performing as expected.

Step 5: Adjust Your Investment Strategy

If you find that your investment account is not performing as well as you had hoped, you can adjust your investment strategy by reallocating your premium payments to different funds. This can help you to maximize your returns and minimize your risks.

Pros and Cons of Variable Annuity Life Insurance

Like any type of life insurance policy, variable annuity life insurance has its pros and cons. Here are some of the advantages and disadvantages of this type of policy:

Pros

• Flexibility: With variable annuity life insurance, you have the flexibility to choose your investment strategy and adjust it as needed over time.
• Potential for higher returns: Because part of your premium payments are invested in funds, you have the potential to earn higher returns than you would with a traditional life insurance policy.
• Tax-deferred growth: The investment component of variable annuity life insurance policies grows on a tax-deferred basis, which means that you don’t have to pay taxes on the gains until you withdraw the money.

Cons

• Fees: Variable annuity life insurance policies often come with high fees, such as management fees and mortality and expense charges.
• Risks: Because the cash account value is tied to the performance of the funds, there is a risk that your account could lose value if the funds perform poorly.
• Complexity: Variable annuity life insurance policies can be more complex than traditional life insurance policies, which can make them difficult to understand.

FAQ

Q: How is the death benefit calculated with a variable annuity life insurance policy?

A: The death benefit is tied to the value of the cash account. If the cash account value is high at the time of your death, the death benefit payout will be higher. Similarly, if the cash account value is low, the death benefit payout will be lower.

Q: How much of my premium payments are invested in funds with a variable annuity life insurance policy?

A: The amount of your premium payments that are invested in funds depends on the specific policy and investment strategy you choose. Typically, a portion of your premium payments will be invested in funds, while the rest will go towards paying for the life insurance coverage and fees.

Q: Can I change my investment strategy with a variable annuity life insurance policy?

A: Yes, you can change your investment strategy with a variable annuity life insurance policy. This can help you to adjust your portfolio as your investment goals and risk tolerance change over time.

Q: Are there any tax benefits to a variable annuity life insurance policy?

A: Yes, the investment component of variable annuity life insurance policies grows on a tax-deferred basis, which means that you don’t have to pay taxes on the gains until you withdraw the money. However, withdrawals are subject to ordinary income tax rates, and there may be additional penalties if you withdraw money before a certain age.

Q: How do I choose the right variable annuity life insurance policy for me?

A: Choosing the right variable annuity life insurance policy requires careful consideration of your investment goals and risk tolerance. It’s a good idea to work with a financial advisor who can help you to choose a policy that is right for you.