The variable death benefit is that aspect of a death benefit that is linked to the performance of the investment account within a policy holder’s variable universal life insurance policy. The death benefit is the amount that can be claimed by the declared beneficiaries of a policyholder.
Features of Variable Life Insurance Policies
A variable life insurance policy is a type a financial product that performs a dual function of an insurance policy and an investment vehicle. The amount of the variable death benefit is exclusive of the guaranteed death benefit that is paid to the deceased’s beneficiaries. This means that the guaranteed death benefit remains constant, while the variable death benefit is subject to the performance of the investment portfolio of the deceased.
In a VUL policy, the policyholder can choose one of the multiple investment options that are offered by the insurer. The options may include investments in equities, fixed income mutual funds, etc. The policy’s cash value is the variable amount, and the policy’s face value is the guaranteed death benefit. The sum of the cash and face values form the total death benefit.
Types of Death Benefits
Generally, three types of death benefits options are available to holders of variable universal life insurance policies. They include level death benefit, return of premium benefit, and variable death benefit. None of the three benefit types are taxable for the beneficiary, but the death benefit can decrease in value in the event that the policyholder borrows money against the policy.
A level death benefit is a constant payout. It means that regardless of the time of death of the policyholder, be it decades after purchasing the policy or shortly after the date of purchase, the insurer is liable to pay the same fixed amount to the beneficiaries. Such an option is relatively cheaper; however, over time, the value of the benefit falls due to inflation.
In the return of premium benefit option, the holder of the term life insurance policy can claim or recover all or part of the premium paid over the duration of the policy, but only if the holder does not die during the term mentioned in the policy.
Variable death benefit is the option where the additional benefit paid to the beneficiaries is subject to the performance of the holder’s investment portfolio.
Advantages of Variable Death Benefits
The coverage of a variable life insurance policy does not expire if the policyholder keeps making timely premium payments. Such a policy enables the holder to change the underlying investments over time. In addition, there is no cap on the returns on investment, which means that the full benefit of the returns accrues to the policyholder.
Variable life insurance is also more flexible in terms of premiums offered. They may also seem attractive to younger investors or those who are seeking to utilize insurance as long-term investment vehicles.
Disadvantages of Variable Death Benefits
The total costs of variable universal life insurance policies are usually higher than those of term insurance policies, which do not offer a separate investment component. Usually, a variable death benefit costs lesser than a return of premium benefit over time.
However, variable death benefits are typically more expensive than level death benefits. They may also include more embedded costs overall, which can add up to thousands of dollars.
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