What is Variable Life Insurance?
The other portion is invested in the funds selected as per your risk tolerance. There are a variety of options, such as equity, debt, balanced, and hybrid funds. The returns depend on the performance of these funds. As your funds are subject to market fluctuations, you must have a thorough idea of the risks involved before investing. A variable plan comes with a lock-in period. Partial withdrawal of your investment funds is allowed only after the lock-in period ends.
Let’s understand this better with an example.
Miss Shama buys a variable life insurance policy with a sum assured of ₹75 lakhs. She pays a yearly premium of ₹50,000 for the plan. A portion of this premium helps sustain the ₹75 lakh sum assured amount. The remaining is invested partly in equity funds and partly in debt funds as per Shama’s risk appetite.
Over the years, as she pays her timely premiums, Shama’s investments generate good returns. Her funds fluctuate at certain stages of her investment journey as a result of the market’s ups and downs. In the long term, her portfolio manages to create a solid corpus. Once the plan’s lock-in period ends, she can partially withdraw these funds and use them to secure her goals.
All this while, she has the peace of mind that her loved ones are financially protected if anything unfortunate were to happen to her.
How Does Variable Life Insurance Work?
To understand how variable life insurance works in detail, we must look at each of its components:
Insurance Component
The insurance component is the default part of a life insurance policy. It works like any other life insurance plan. You choose a sum assured amount, based on which you pay regular premiums. In case anything was to happen to you, this sum assured will be paid to your loved ones to help them tide over financial difficulties.
One of the advantages of variable life insurance is that, based on your plan, you can increase your sum assured. The investment returns can be added to your sum assured to increase the financial protection for your loved ones.
Investment Component
The invested portion helps you earn returns as per the market conditions. However, you must remember that as with other investment-linked products, a variable life insurance policy also comes with its share of risks. If you invest in equity funds, and the equity market dips to a low, your invested funds will also be affected. Consequently, if the market is performing well, your returns will be higher, too.
Policy Fees
To support the various features and benefits of variable life insurance, the insurer charges a few fees. Common fees in a variable plan include mortality charges, premium allocation charges, policy administration fees, and so on. You must get a clear idea of all the fees involved before you sign the policy document.
Types of Variable Life Insurance
The term ‘variable life insurance’ can be understood as an umbrella term that comprises several types of plans:
ULIP
A Unit-Linked Insurance Plan or ULIP is the most common and typical type of variable life insurance. Here, the policyholder enjoys life insurance coverage while also gaining the chance to earn market-linked returns. A ULIP comes with various fund options and multiple investment strategies. It allows the investor to make the most of market opportunities and align their investment journey with their life goals.
Variable Annuity
A variable annuity is a type of whole life insurance which provides a regular income during one’s retirement. One must opt for it a few years before their retirement. It allows for a larger corpus to grow and compound.
The premium is invested in chosen funds, whose returns are reaped during retirement. As the returns are market-linked, the payouts of this plan can vary. Hence, such a plan is called a ‘variable annuity’ as compared to a fixed annuity, where the payouts are fixed. In addition, the nominee of the annuity plan receives the life cover amount when the policyholder passes away. A variable annuity can be an invaluable addition to your retirement planning portfolio.
Child Plans
A child plan provides life insurance coverage to the policyholder and financial support for a child’s major events, such as higher education, marriage, and so on. The premiums of a child plan get partly invested in various financial instruments which allow for the creation of a large corpus. Over the long term, this corpus keeps growing to provide substantial payouts at major moments in the child’s life.
Endowment Plans
An endowment policy is a savings-cum-life insurance plan. In endowment plans, if the policyholder passes away, the nominee receives the sum assured amount. However, if the policyholder survives the policy term, they receive a lump-sum payout. In some cases, they may also get to enjoy the various types of bonuses in life insurance. Thus, an endowment plan allows for life insurance coverage as well as wealth accumulation.
Pros and Cons of Variable Life Insurance
A variable life insurance plan comes with some benefits as well as some disadvantages. The following table lists them out:
Pros of Variable Life Insurance
| Cons of Variable Life Insurance
|
Lifetime Coverage:
One of the most important benefits of variable life insurance is the life cover it provides, ensuring financial protection for your loved ones.
| Uncertainty about Funds:
Unlike a fixed plan, a variable plan leaves room for uncertainty, as the returns depend on market fluctuations.
|
Chance to Earn High Returns:
Another major advantage of variable life insurance is that the policyholder can enjoy potentially high returns. It helps the policyholder get a step closer to their financial goals.
| High Fees and Charges:
A policyholder has to pay multiple fees and charges for a variable plan. It compensates for the various services one can avail of with the policy.
|
Multiple Fund Options and Strategies:
There are various fund types you can invest in with a variable plan. What’s more, you can switch from one fund to the next as well. In addition, you can also opt for a particular investment strategy that meets your goals. These options give you a high level of flexibility.
| Complex Features and Wordings:
A variable life insurance plan may seem complex to new investors. It comes with multiple features and options, leading to a large list of terms and conditions.
|
Cash Value Growth in Variable Life Insurance
You will often come across the term ‘cash value’ in a variable life insurance policy.
What is Cash Value?
It refers to the sum of money that accumulates or grows over time with a life insurance policy. For the most part, it does not include the sum assured, as the latter is often a fixed amount. Even in policies where the sum assured increases due to the addition of the cash value, there is often a minimum fixed amount beyond which the sum assured cannot be reduced.
Instead, cash value is the money that builds up over time as a result of prudent saving and investing. The more the cash value, the better it is for you, as you can enjoy more funds to support your financial needs.
Understanding Increase in Cash Value
As you may know, a portion of the premium goes towards investments. The wealth that builds up as a result of these investments is referred to as cash value. It increases as your investments gain positive returns. Hence, choosing the right investment option is important.
Based on the variable life insurance plan, one can withdraw from the cash value after the lock-in period ends. The withdrawn funds can be used to meet one’s financial needs with ease.
Let’s take an example to understand this.
Mr Tarun pays ₹2 lakhs annually towards investments in his variable life insurance plan. It amounts to ₹14 lakhs in a span of 7 years. Within these 7 years, his portfolio has grown at an average rate of 12%.
By the end of the 7-year period, his investments have grown to ₹22.6 lakhs (approximate) This means his total cash value has grown by ₹8.6 lakhs (22.6 lakhs - 14 lakhs).
Tarun can withdraw from the plan after the lock-in period of 5 years is complete. It will allow him to support his goals, take care of pending financial matters, and more.
How to Buy Variable Life Insurance?
Now that you know the advantages of variable life insurance, let’s see how you can buy a plan to benefit from them:
Determine the Financial Aspects
The first thing you must do is sort out the numbers. It mainly includes the sum assured amount, the investment goal amount, and the budget for the premium. Once you have these sorted, you can choose plans accordingly. Use a life insurance calculator to make planning easier at this stage.
Research Various Plans
You will find a host of options in the market. To choose the correct one, evaluate your options based on the premium quotes, past performance, investment projections, additional benefits, and other aspects. Choosing the right product will help you make the most of the benefits of life insurance.
Apply Online
Once you have a plan in mind, apply for it online. Fill out the application form, submit the documents as required, and give the necessary medical tests.
Get the Medical Check-ups Done
Insurers ask the applicants to undergo medical tests before issuing a policy. It helps them get a clear idea of the individual’s health and assess medical risks, if any.
Who Should Opt for a Variable Life Insurance Policy in India?
The following individuals will be able to enjoy the benefits of variable life insurance the most:
1. Those with A Long-Term Investment Horizon
As any seasoned investor will tell you, investing for the long term is always ideal. A longer term allows the corpus to compound and grow at a steady rate. If you have a long-term investment horizon, you will find variable life insurance a valuable addition to your portfolio.
2. Those with a High-Risk Appetite
Variable life insurance has equity options, which are highly subject to market volatility. If you have a high-risk appetite, consider opting for an equity-oriented variable life insurance plan.
3. Those Who Want to Save on Tax
One of the major advantages of variable life insurance is that it offers tax benefits as well. The premiums paid towards a life insurance plan are tax-deductible under Section 80C of the Income Tax Act, 1961. Life insurance tax benefits are subject to terms and conditions. **
4. Those Planning Their Legacy
A life insurance policy is a great way to ensure your heirs have a solid financial foundation. Variable life insurance adds an extra level of financial support as a result of the investment-linked returns.
5. Those Planning for their Retirement
A variable life insurance policy can help provide a regular source of income during one’s retirement.
Riders to Increase Coverage for Variable Life Insurance
A variable life insurance plan offers a host of features. If you wish to enjoy the advantages of variable life insurance even further, consider opting for the following riders:
1. Accidental Death Benefit Rider: Provides an additional lump-sum payout in case the insured passes away due to an accident.
2. Waiver of Premium: Waives off the future premiums while letting the policy continue in case the insured suffers a disability or a critical illness.
3. Total and Permanent Disability Rider: Provides financial support in case the insured suffers an accident that leaves them totally and permanently disabled.
Do note that life insurance riders come at an additional premium. You can also change the premium payment mode to a monthly or quarterly basis if you find the annual premium too high with the addition of riders.
How to Choose the Right Variable Life Insurance Policy for Your Needs?
Before you finalise a variable plan, make sure to follow these steps:
1. Compare on the Basis of Several Factors
Variable plans often come with details about their past performances, projected growth, available investment strategies, and more. Some plans may have attractive numbers, but they may come with more risk. Consider these aspects before proceeding.
2. Check the Costs of the Plan
As mentioned earlier, variable plans come with a few fees. Check if the total premium you pay is worth the returns you will get. You can get quotes from different insurers and compare them before going ahead. Just because a plan has a lower premium may not mean it is necessarily good. Make sure the premium balances the benefits you are getting. The premium estimates from a life insurance calculator can make your planning easier to a great extent.
3. Past Performance
While past performance does not guarantee future success, it does show the expertise of the fund manager. Remember to review the past figures of the fund over a 3-year or a 5-year period (or longer). It is advisable to choose a fund whose returns are high, but which still aligns with your risk appetite.
4. Review the Insurer
The variable life insurance plan may be the ideal one for you, but if it is not provided by the right insurer, the benefits may not be worth it. Therefore, review the insurer on various fronts as well. Check their customer service, read customer reviews, and more. You may even want to check their annual report to be clear about their financial strength.
5. Keep Reassessing
Even after you have finalised the variable life insurance plan, it is important to keep reviewing it at periodic intervals. If the performance is not up to the mark, consider switching the fund options (e.g., equity to debt or vice versa) or going for a new investment strategy.
Factors Affecting the Premium of Variable Life Insurance
You may have gotten a premium estimate from the life insurance calculator. But have you wondered what factors will affect the actual premium you will have to pay?
1. Age
The older you are, the higher your premium is likely to be. Older individuals tend to have a higher risk of illnesses and life-threatening conditions.
2. Coverage
Your premium will be high if you choose a high sum assured and vice versa.
3. Present and Past Health Conditions
If you are and have been a healthy person, chances are your premium will be lower. Chronic health conditions, genetic risks of illnesses, and unhealthy lifestyle habits such as smoking or excessive drinking can all lead to a high premium.
4. Gender
As women tend to have a higher life expectancy, they may pay a lower premium than men.
5. Policy Term
The longer you choose to receive coverage, the more your premium will be. It is one of the reasons why term insurance tends to be more cost-effective than other life insurance plans. To get premium estimates for a term plan, use a term insurance calculator.
6. Premium Payment Tenure
The duration for which you will pay the premium also affects the regular cost. For instance, a shorter tenure will mean your regular premium amount is high. Similarly, a longer tenure will lead to a lesser yearly/monthly/quarterly premium amount.
7. Investment Fund Option
The overall cost may also change depending on the investment fund. Some funds come with a higher administration charge. In addition, if you switch funds or opt for some other benefit, the total cost may increase for that year.
8. Occupation
Individuals who work in dangerous fields may have to pay higher insurance premiums. They work in environments where the risk to their lives is high.
9. Lifestyle
If you lead an unhealthy or risky lifestyle, chances are your premiums may be high. People who engage in high-risk adventurous sports such as surfing, skydiving, and skiing, are likely to pay a higher premium.
A variable life insurance plan is a unique life insurance product that offers the best of both worlds: insurance and investment. It provides peace of mind as a result of its extensive insurance coverage, along with the chance to earn market-linked returns. By doing so, it allows you and your loved ones to live a life free from financial stress and pursue dreams without worries.
Before opting for variable life insurance, it is important to note the risks and complexity involved in the process. Reaching out to a financial consultant for personalised guidance can help.
FAQs on Variable Life Insurance
Investing In Variable Life Insurance
Is Variable Life Insurance in India a good investment option for retirement planning?
Yes, a variable life insurance policy can be a very good addition to your retirement planning portfolio. It provides three major benefits:
a. Insurance coverage to protect the future of your loved ones
b. Investment-linked returns that can support you during your golden years
c. Tax benefits to reduce your tax outgo and retain more of your income.
The assurance of life insurance coverage and the returns from the plan can help you have a happy and peaceful retirement.
Can I change my investment options in Variable Life Insurance in India?
Yes, you have the option to change your investments from one fund to another within your variable life insurance plan. Some insurers might levy a fund-switching charge while others may provide this benefit for free.
Managing Variable Life Insurance
What happens if I miss a premium payment on my Variable Life Insurance policy in India?
Missing a premium payment may lead to your policy being deemed inactive. However, there is a grace period if you miss the payment due date. Make sure to pay the premiums within the grace period or else you may lose the policy.
Can I surrender my Variable Life Insurance policy in India before the maturity date?
Yes, surrendering your variable life insurance policy is possible. However, you will have to pay surrender charges. You can refer to your policy documents to get an idea of the same.
It is important to note that the payout you receive on surrendering may be considerably lower than your total cash value. Your funds will also not earn up to their full potential. Consider reaching out to your insurer regarding the surrender before finalising the decision.
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