How Does a Typical Variable Life Policy Investment Account Grow?

Variable Life Policy is a type of life insurance that does more than give protection to your family, because it also gives you a simple way to grow money slowly over many years. Special thing about this type of policy is that you get to decide where the extra money, called the cash value, will be invested and this means growth of policy will change based on how well those investments do in the market.

Many people like this type of policy because it can earn more money than regular life insurance, but it is also important to understand that this kind of policy comes with more risk since money can go up or down when the market changes.

In this simple guide, you will learn how investment part of Variable Life Policy grows, how returns are made and what risks you should know before choosing it.

What Is a Variable Life Policy?

Variable Life Policy is a life insurance plan that has two simple parts inside it:

• Insurance coverage:- This part gives money to your family if something happens to you.
• Investment account:- This part collects money over time and may grow based on where you choose to invest it.

In normal life insurance, insurance company manages everything, but in Variable Life Policy, you can choose where the cash value goes. This means you have more control and also the chance to grow your money in a better way if market performs well.

How Does the Investment Account Grow?

Cash value inside Variable Life Policy grows through investments in the market. When you pay your monthly or yearly premium, a part of the money is used to keep your insurance active and rest is added to your investment account.

1. You Choose Investment Options

Policy gives you different places to put your money and these choices are known as sub-accounts. They work in a very simple way, similar to mutual funds. You can decide where your money should go based on what makes you feel comfortable.

Some common choices are:

• Stocks
• Bonds
• Mutual funds
• Money market funds

This means you can create your own mix of investments based on how much risk you want to take.

2. Growth Changes With the Market

Value of your investment account will go up or down depending on how investments you chose perform in the real market. If the market grows and the investments do well, then your cash value may also grow. If market falls, the value in your policy may go down too.

This is almost same as putting money in mutual funds on your own, but here it happens inside your life insurance plan.

3. Chance for Higher Earnings

Because money is linked to market, Variable Life Policy can give higher earnings than old style life insurance, which grows at one fixed rate. For example, stocks can rise very fast when the market is strong, while bonds grow more slowly but stay more stable in bad times.

Simple real life example is how the S&P 500 index fell by a large amount in 2008 but grew by a big amount the next year in 2009. This shows how market ups and downs can affect the cash value inside Variable Life Policy too.

Read Can I Use My 401(K) to Buy a House?

Why Do People Choose Variable Life Policies?

People usually choose this kind of policy for two simple reasons that are easy to understand.

1. Chance for More Growth

With this policy, your money is placed in the market and because of this, it can grow to a larger amount over many years. This can happen because market investments like stocks and funds may rise over time and this can help your cash value become higher than what you would get from a policy that gives only a fixed and steady return.

2. Flexible Death Benefit

When your investment account grows well, even the amount that your family receives after your death can become higher. This makes the policy more flexible because both the cash value and the death benefit can change based on how well your investments perform.

But How Does the Policy Actually Grow in Real Life?

Here is a very simple way to understand how the policy grows step by step:

1. First, you make your premium payment.
2. The insurance company then takes out some charges, which include the cost of running the plan and the cost of your insurance protection.
3. Whatever money is left after these charges is added to your investment account.
4. That money then goes up or down based on how well your chosen investments do in market.
5. You can check your account anytime and change your investment choices if you feel something else may work better for you.

Risks and Important Things You Should Know

Variable Life Policy can help you grow money, but it also comes with some risks that you should understand clearly before you choose it. Here are simple points you need to know.

1. Market Risk

This is most important risk to think about. If the market does not do well, the cash value inside your policy can drop, because the money is linked to market investments. There is no promise or fixed return like you get in normal life insurance plans that grow at a steady rate.

2. Risk of Policy Ending

If your investments do not earn enough money and your premium is not high enough to cover charges inside the policy, then the policy may end on its own. This is called a lapse and it means your insurance protection will stop, which can be a serious problem for you or your family.

3. You Must Stay Active

Since you decide where the money is invested, you cannot just leave the policy alone and forget about it. You need to check your sub-accounts from time to time and you may have to move your money to different options if you feel something else may work better.

4. Guidance From a Trained Person Helps

Because this policy uses investments that are linked to market, the person who sells it must hold a license that allows them to talk about these financial products. This helps make sure you get help from someone who understands how these investments work.

5. The Policy Comes With a Detailed Document

Every Variable Life Policy is given with a long document called a prospectus. This document explains the risks, fees and investment choices in very clear detail. It is very important to take your time and read this document before you buy the policy, so you understand what you are getting into.

Advantages of Variable Life Policy

Variable Life Policy offers a few simple benefits that people find helpful.

• Chance to Earn More: Because your money is placed in the market, there is a chance that it may grow to a higher amount when the market performs well.
• Cash Value Can Grow Faster: In times when the market is strong, the cash value inside the policy can grow much faster than regular policies that only give fixed and steady returns.
• You Can Choose How You Want to Invest: You get to pick the type of investments you feel comfortable with, which gives you more control over how your money grows.
• Some Plans Have Flexible Premiums: In certain cases, these policies allow some flexibility with premium payments, which can make it easier to manage.
• Death Benefit May Increase: If your investments perform well for many years, even the death benefit can become higher.

Disadvantages You Should Think About

Even though this policy has benefits, it also has some drawbacks that you should understand.

No Promise of Returns: There is no fixed or guaranteed growth, because the value depends on market movements.

Market Ups and Downs Can Lower Value: When the market falls, the cash value in your policy can drop, which can be worrying for some people.

Higher Fees and Charges: The fees inside this kind of policy can sometimes be higher than other types of life insurance.

You Need to Spend Time on It: The policyholder must check the investments from time to time, so this is not the right choice for someone who does not want to stay involved.

Who Should Think About Getting Variable Life Policy?

This kind of policy is mainly good for someone who:

• Understands the stock market a little or is not scared of market risk.
• Wants slow and steady long-term growth.
• Is willing to look at their investments from time to time.
• Wants both life insurance and investment in one place.
• Has the ability to take more risk without worry.

Learn What is a loan and how does it work

Final Words

Variable Life Policy grows because policyholder chooses to put the cash value into different sub-accounts, which may include funds that invest in stocks, bonds or other market-based options. This can help the policy grow faster than traditional life insurance plans, but it also brings more risk because the value can rise or fall depending on how the market behaves. Most important way to succeed with this type of policy is to understand how the investments work, stay involved with your choices and make sure your decisions match your comfort level and your long-term plans.

If you want a chance for more growth and you do not mind the ups and downs of market, this policy can be a good option. If you want safety and fixed returns, then you may want to look at other types of insurance plans.