In addition to running a blog about personal finance, I am also a professional freelance writer and journalist. Recently, one of my clients sent me a request to research and write an article about flexible premium variable whole life insurance. I thought to myself, okay, how hard could it be â€“ surely I could find information online about it. Yeahâ€¦now I can. Because I wrote an article about it which I assume heâ€™ll be publishing.
However, since I have no idea where on the web heâ€™ll be publishing that article and I thought you all here at the PFHC might be interested in knowing about it, hereâ€™s a brief synopsis of what flexible premium variable life insurance is:
Letâ€™s take a step back for a moment and look at ordinary types of life insurance. The standard forms of life insurance, which you probably carry if you are a typical American are either term life or whole life insurance. Term life is called that because it lasts for a certain â€œtermâ€ and then expires, so you might get a thirty year term when youâ€™re 40 and then when youâ€™re 70, your term expires and you are no longer covered. Whole life insurance is generally not as good a deal from a monetary standpoint (it costs a bit more), however it has the advantage of being available for your entire life as long as you continue to pay for it and it builds cash value.
Whole Life Insurance as an Investment
Now as I said above, whole life insurance builds value in much the same way an investment in the stock market would build value (at least in theory) and can be withdrawn at a certain date (it was common practice at one time to buy child whole insurance so that parents could save for college by cashing out when the kid was 18). However, that value often doesnâ€™t keep up with inflation and thatâ€™s the main reason that those trying to save for college have largely abandoned child whole life insurance in favor of 529 plans â€“ the 529 plans usually offer a better rate of return.
Anyway, some geniuses at the various insurance companies came up with a new way to sell whole life insurance â€“ by making it a true investment vehicle. The idea here is that you invest the money in the stock market, in much the same way you might invest other money into the stock market. Then, when you die someday, your heirs inherit the money that was invested for you at the then current value of your portfolio. As near as I can tell, the advantage of this over simply putting money away is that there may be some tax benefits.
This kind of life insurance is called variable whole life insurance because the amount that your heirs will get varies based on the amount of money in your stock portfolio.
A Frankenstein of Life Insurance
Now, back to that weird term we started with â€“ flexible premium variable life insurance. We know what the variable part of it is â€“ the amount your heirs will earn varies depending on how much is in the account. The flexible premium part is exactly what it sounds like â€“ itâ€™s a way for you to choose how much to pay or if you want to pay at all without losing coverage. There are limitations on it though so itâ€™s not like you can set up the account and then just pay $1 each year for the rest of your life.
I referred to it as a kind of Frankenstein of Life Insurance because itâ€™s a sort of mashup of term and variable whole life insurance. The idea is to try to give you the greater flexibility and lower costs of term life insurance while giving you the better security that you get from whole life insurance.
Who Is It For?
Okay, bottom line: the odds are good that if you needed me to explain to you what flexible premium variable whole life insurance is, itâ€™s not for you. As I said, you can just as easily invest money in mutual funds and leave a will which gives the money to your children. The research I did seems to indicate however that high earners may get a tax break from taking flexible premium variable whole life insurance instead.
Talk to your financial planner if you think this kind of insurance might be right for you. Otherwise, just relish the thought that the next time youâ€™re at a party you can talk about flexible premium variable whole life insurance as if youâ€™re an expert on the subject and let everyone stare at you in awe for being so knowledgeable about unusual financial products.
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