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Understanding life insurance can sometimes be a daunting task due to the plethora of options available to consumers. One of these options, Variable Universal Life Insurance, often becomes the choice for the wealthy due to its flexibility and potential for tax-deferred growth. This article aims to shed light on what Variable Universal Life Insurance is and why it could be a preferable choice for the affluent.
Defining Life Insurance
Before diving into Variable Universal Life Insurance, it's essential to understand what life insurance is. Essentially, life insurance is a legally binding contract between an insurance company and a policy owner, promising the insurer will pay a predetermined sum of money to the policy's named beneficiaries upon the death of the insured. The policy owner maintains this promise by paying either a single premium upfront or regular premiums over time.
There are two main categories of life insurance: term and permanent. Term life insurance policies expire after a specified number of years, while permanent life insurance remains active until the insured's death, the policy is surrendered, or premiums cease to be paid.
The value of a life insurance policy is largely dependent on the financial strength of the issuing company, as they are responsible for paying claims. State guaranty funds may cover claims if the issuer is unable to.
An Overview of Variable Universal Life Insurance
Variable Universal Life Insurance is a type of permanent life insurance that combines the potential for tax-deferred cash value growth with a death benefit protection. Unlike traditional life insurance policies, these policies invest the premiums and cash value into separate accounts, much like mutual funds, offering a range of investment options to construct a comprehensive portfolio within the policy.
The death benefit provided by this policy is most substantial while the policy owner is young and decreases as the cost of insurance rises over time. The cash value grows tax-deferred and can be withdrawn as loans, sometimes with no net interest charge, thus avoiding income taxes.
The difference between the death benefit and the cash value is known as the net amount at risk to the insurance company. Policy owners can lower the death benefit and the net amount at risk as the insurance costs rise. However, flexibility is limited to a specific range, or corridor, in relation to the cash value, death benefit, and premiums.
The Allure for the Wealthy
One of the most attractive features of Variable Universal Life Insurance to high net worth individuals is the absence of a cap on contributions or income for eligibility. Wealthy individuals can significantly invest in their policy, allowing the cash value to grow tax-deferred.
For instance, a wealthy person can put $1,000,000 a year into a variable life policy, let it grow tax-deferred, and later withdraw money tax-free. Additionally, insurance companies increasingly pay credits to policy owners after maintaining the policy for a certain number of years, potentially reducing insurance costs.
Variable Universal Life Insurance offers a unique blend of death benefit protection and investment potential. With its tax advantages and the option to invest in separate accounts, it provides a compelling option for affluent individuals who want more than a simple death benefit from their life insurance policy. However, potential policyholders should remember that life insurance is only as good as the financial strength of the issuing company. Therefore, proper research and consultation with financial advisors are essential before choosing this type of insurance.
Variable Life Insurance is a permanent universal life policy that has a death benefit as long as the cash value and premiums are sufficient to pay the increasing cost per-thousand, while the premiums and cash value have the option of being invested in separate accounts which behave much like mutual funds.
Often the policy-owner has a choice of many investment options, and can construct an entire portfolio within the policy.
These provide a benefit in a few ways: not only is there death benefit protection that is most substantial while the policy-owner is younger, but also the cash value account is able to grow tax-deferred, and the cash value can be withdrawn as loans which sometimes have no net interest charge but avoid income taxes.
This may sound better than it turns out to be, considering the cost of insurance, but it can also be better than some opponents realize. The difference between the cash value of the death benefit is known as the net amount at risk to the insurance company.
Fortunately these policies are flexible such that the insured can lower the death benefit and the net amount at risk as the cost of the insurance rises, as is the case with universal life policies. They are only flexible to a point, however, and they are sometimes known in the industry as corridor insurance, since there is a specific range, or corridor, in which the cash value, death benefit, and premiums can be in relation to one another.
Companies now are increasingly likely to pay credits to the insured after the keeping the policy for however many years, which can lower the insurance costs by a fraction of a percent.
The benefit of these policies to the very wealthy is that there is no cap on contributions and no cap on income for eligibility. If a wealthy person wants to put $1,000,000 a year into a variable life policy, and let it grow tax deferred, and take money out tax-free, that option is available to him or her.
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The Federal Deposit Insurance Corporation (FDIC) is a government entity created by the Glass-Steagall Act of 1933