Variable Annuity Life Insurance

Variable life insurance is a type of permanent life insurance. Like all permanent life insurance products, it has two parts: The death benefit, which is the amount of money paid to the beneficiary when the policyholder dies, and the built-up cash value account to which interest is credited while the policyholder is alive and paying premiums.

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Variable Annuity Definition

A variable annuity is a financial product that pays the annuitant an amount of money each month. The premium, or the amount given to the insurance company, is invested in either stock, bond or money market funds in order to capture gains that exceed those of Treasury bills and bonds.

An annuity, then, is almost the direct opposite of life insurance. Life insurance pays when the policyholder dies, while an annuity pays as long as the policyholder is alive. However, the important distinction is that an annuity can be structured to pay a beneficiary upon the death of the original policyholder. This type of combined product is relatively new and is not suited for all investors.

A variable annuity can be set up to be a type of variable annuity life insurance. For example, the original annuitant can purchase a contract that specifies his or her spouse also receives monthly payments or that he or she receives the balance of the premium that has not yet been paid out. In this way, the variable annuity functions both as an annuity because it pays out monthly, and it functions as a life insurance product because it pays a beneficiary upon the death of the original policyholder. However, the loss of risk of principal may affect the amount available for the death benefit.

Where Can an Investor Buy Variable Annuity Life Insurance?

Insurance companies are allowed to sell variable annuities along with life insurance. Investors should be aware, however, that because variable annuities invest in the stock market, that the sales person should not only be licensed by the state to sell insurance but must also be registered with the Securities and Exchange Commission. He or she may also be required to have other licenses and registrations depending on the state in which he or she sells the insurance and financial products.

The owner of a variable annuity life insurance product can usually choose among several different types of investments. Some insurance companies offer 20, 30, 40 or more kinds of investments ranging from ultra-conservative to ultra-aggressive. Investors can also select between domestic and foreign funds. One of the best advantages provided by a variable annuity life insurance product is the almost instant diversification it can provide. If the investor chooses two or three sectors that are not connected to one another or dependent on one another for the gains, he or she can create a relatively inexpensive “portfolio” of investments.

One caveat to this type of product is that the risks are solely that of the investor. He or she is responsible for choosing the investments. While the insurance company purchases the funds and manages the account on the investor’s behalf, the gains, or losses, reside with the investor.

Some insurance companies allow the policyholder to choose between a fixed and variable death benefit. The death benefit on a fixed policy is set when the policy is written. It is for that amount and that amount only, regardless of how much cash has accumulated in the account. A variable death benefit pays not only the face value of the policy but also the amount of cash that has built up.

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Who is Best Suited for Variable Annuity Life Insurance?

Variable annuity life insurance is usually best suited for individuals who have more than just a little understanding of insurance and financial contracts. It is also helpful for investors to have a deeper understanding of how fluctuations in the stock and bond markets will affect the value of the annuity. For example, during a market downturn, it is possible for a variable annuity life insurance product to lose money. The principal within the policy is always at risk. While an investor can achieve great gains during market upswings, the level of risk must match his or her level of tolerance.

It is important to remember that a variable annuity life insurance product is part insurance and part investment product. For investors whose primary need is the death benefit in order to provide for a beneficiary, a more standard life insurance policy may be a better choice.

What are the Options to Variable Annuity Life Insurance?

One alternative to a variable annuity life insurance policy is a whole life policy. A whole life policy also provides permanent insurance that lasts for the life of the policyholder. The portion of the premium that is invested, along with earnings that are credited to the cash portion of the account, grow tax-deferred until the policy is either surrendered or until it matures.

With a participating whole life policy, an investor in effect becomes a shareholder in the insurance company. He or she is paid a dividend based on the financial performance of the company. The dividend can be credited to the account, or it can be taken as cash. In this way, it mimics the variable annuity because it not only provides a death benefit but also provides for a monthly or quarterly payout.

Further, the tax treatment of a whole life policy may also be more beneficial to certain policyholders. As the proceeds paid to a beneficiary are not normally taxable, a whole life policy may be a more effective estate planning strategy than a variable annuity life insurance policy. And, an annuity represents a financial contract that cannot be broken. Once the premium is given to the insurance company, it will not be returned except in the form of the payouts. A whole life policy, on the other hand, may be surrendered. While the policyholder may not receive the entire amount back, he or she will at least have a vested amount that could be returned.

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