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What is Variable Life Insurance and How Does it Work?

Insurance Basics for Medical Professionals

By Jeffrey H. Rattiner, CPA, CFP®, MBA

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After determining the need for insurance and the amount to purchase, the doctor-client and financial planner’s next task is to match those needs to the doctor-client’s objectives to determine what type of policy the client should purchase. The life insurance industry features more products today than ever before. One reason for this change is that, clearly, the insurance industry has expanded its product base to become more competitive. Another reason is that clients’ needs are constantly changing and the insurance companies must keep up with those needs or run the risk of having funds withdrawn from their companies. New and different types of life insurance products are here to stay. Since life insurance represents a significant part of a client’s risk-management program, planners have to be versed in the specifics of the varied product base.

Variable Life Insurance

A variable life insurance policy is similar to a whole life policy. It was designed as a solution to the problem of the decline in purchasing power that accompanies inflation. The premium is fixed, and the face amount of the policy varies with the type of investment. For example, the cash value within a variable life policy may increase substantially due to the types of investment selected for that policy. Further, because IRC regulations require that the cash value not exceed a specified percentage of the death benefit, an increase in cash value may also increase the face amount of the policy so that it is in compliance.

Cash Value Not Guaranteed

The cash value of the policy is not guaranteed. The death benefit never goes below the original face amount. In other words, there is a built-in guaranteed death benefit. Variable life policy funds are in a separate account of the company. If the company should go into receivership, insureds who have their policies in a separate account are unaffected by what happens to the general account of the insurance company. When the insured takes out a loan, the equity from the account becomes collateralized. The insurance company then transfers an amount equal to the loan to the general account. The collateralized equity stays in the general account until the loan is paid off.

Advantages of Direction

The ability to direct the account value to the investment of the policyholder’s choice is the key advantage of variable life insurance policies. The sale of one fund and the purchase of another within the contract is not a taxable event. The premium can never be raised, no matter how poor the investment is. The policy must be registered under the Securities Act of 1933 as a security and sold with a prospectus. The agent selling the policy must be licensed under the Securities Exchange Act of 1934 and in most states must pass the National Association of Securities Dealers (NASD-FINRA) series 6 and 63 examination. Because of the uncertain nature of the investments in variable life policies, policyholders sometimes are given a limited option to return to a fixed life type of policy (called the 6E-2 Rule). A disadvantage to variable life policies is the limited number of fund choices available to the policyholder.


Variable life insurance is most appropriate for younger individuals, people with moderate-to-high risk tolerance, people who want to control their investment account over the long term, and people who do not necessarily have to rely on their account balance.


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