The Current Market and you Variable Life Insurance Policy

The recent stock market crash can affect not just your investment portfolio, but your variable life insurance policy may also be in danger of taking a downward spiral. Variable life insurance policies have become increasingly popular because of larger cash value gains and currently account for up to 40 percent of all life insurance premiums. However a variable life insurance policy exposes you to a higher risk because your policy's value is directly tied to the investments you make. The insurance industry has treated variable life as simply a better-performing version of whole life and universal life without realizing that inherent investment volatility makes variable life a very different kind of life insurance.

The major reason why people fail to recognize how different variable life is from whole and universal life is policy illustrations. Agents and buyers get their primary understanding about life insurance by viewing an illustration provided by the insurance company. Illustrations show how a policy is projected to perform, based on the premium pattern shown and pricing factors that remain constant throughout the illustration. The most important pricing factor is investment results, with mortality of less importance. But we need to keep in mind that past performance does not guarantee future returns!

What differentiates this policy from a more traditional option is the dramatic fluctuation of a policy's cash value. Stock market gains can result in a rise in cash value which can lead to a cash rich policy. However, large market losses could result in negative consequences.

I am an aggressive investor and I like investing in options that can give higher returns. However, I would like to keep my investments and my life insurance separate. Is there any guarantee that the year there is either a financial or a medical emergency in my life, the stock market won’t be experiencing a free-fall like it has been recently. If that does happen, I won’t be able to access the cash value of my policy when I need it the most.

Many variable life insurance policies have been minimally funded in hopes that stock market gains will help fund their policy. A large amount of policies were sold with the assumption that the stock market would consistently provide big returns. But with the recent stock market plummet these policies face serious risk.

In order to prevent these policies from lapsing, there are strategies you can implement. Understanding your choices in these tough economic times will assist in protecting your investment.

1. Funding your existing policy at a much higher level to make up for the "evaporation" of your cash value. This will help keep your policy in force, and possibly avoid a policy lapse

2. Reducing your policy's death benefit may allow you to keep your premiums at their current level.

3. Replacing the variable life policy with a whole life or universal life, giving you a much better chance at managing the premium costs.

For those who own a variable life insurance policy, it might be time to consider reviewing their policy and trying to replace it with either a whole life or a fixed universal life policy. “Regardless of what the stock market does, these policies are guaranteed to provide coverage as long as the level premiums are paid. “People need to sleep at night. A policy that is rich in guarantees, and isolated from market ups-and-downs, could help them do that."