Variable Annuities Part 4 of 4: Two Alternatives to Consider If You Need Insurance, Too
It’s a new year, and hopefully, it’s already starting off with a bang for you! To wrap up our voyage through variable annuity alternatives … and give you a leg up when it comes to financial planning in 2018 … I’m going to cover insurance today.
Insurance? I can hear the wheels turning already, as you wonder “How can that be an investment”? But the truth is, both Variable Life and Variable Universal Life insurance can be considered appropriate “investments” for you to consider as part of your overall strategy.
Variable Life Insurance
A variable life insurance policy combines both A) Regular whole life insurance and B) A stock market investment. These policies let you buy the life insurance you need, while investing the cash value of your policy … tax-deferred … in the stock market.
The hope is that you’ll achieve higher growth than would normally be offered through a whole life insurance policy. You get the potential for higher returns, plus a fully paid policy. But you also assume a degree of market risk.
Just as with a whole life insurance policy, you make periodic fixed premium payments to cover the current cost of the insurance and to build up your cash value. Once your cash value is sufficient to cover the insurance costs for the remainder of your actuarial expected life span, you stop making premium payments and the annual insurance costs get deducted from your cash value. Also, you can borrow against the cash value of a variable life policy at the interest rate stated in your policy contract.
Like a variable annuity, variable life gives you the ability to invest the cash value of your policy in mutual fund subaccounts offered by the insurance company. Assuming you’re able to invest wisely, this will allow you to grow your cash value more quickly so that your insurance policy can be paid up sooner.
You can usually switch your investment between funds with a phone call, though there may be limits like only 12 free trades per year. Because you’re using subaccounts, the cash value of your policy is also not at risk in the event of the failure of your insurance provider – though the life insurance portion is.
Still, a variable life policy is a life insurance policy — not a purer retirement savings vehicle like annuities. Therefore, the overall costs are going to be higher because you’re also paying for the insurance coverage you’re getting.
Advantages vs. Variable Annuities
Advantage #1. You get a life insurance policy. If this is what you want, it’s an advantage.
Advantage #2. You can borrow against the cash value in your policy, which can come in handy in times of emergency.
Disadvantages vs. Variable Annuities
Disadvantage #1. Since you’re paying for a life insurance policy, your costs will be higher and your net returns lower. If you don’t need life insurance, this is a disadvantage.
Disadvantage #2. You have to stick to a fixed premium contribution schedule. With a variable annuity, you can invest as much as you like, whenever you like.
Who Should Consider Variable Life Insurance?
If you A) Need life insurance and B) Are willing to accept the added responsibility and risk of stock market investing, a variable life insurance policy might be right for you. However, if you already have a variable life policy and you are no longer in need of insurance, you may want to consider converting the cash value of your policy into a variable annuity. Contact your insurance agent and inquire about a tax-free 1035 exchange. He or she will be able to help you from there.
Variable Universal Life Insurance
This is basically the same as variable life insurance with one key difference: A variable universal life policy allows you to vary the amount of your annual premium contribution — or suspend it altogether, if you choose. As a result, the cash value and amount of insurance coverage you have will fluctuate, depending on the adequacy of your premium payments.
Other than that, a variable universal life policy and variable life policy are essentially the same. Both allow you to invest the cash value of your policy in a selection of mutual fund subaccounts, where it will grow tax-free. Both also allow you to borrow against the accumulated cash value in your policy. Thus, a variable universal life policy has the same advantages and disadvantages versus a variable annuity as a variable life policy would.
Who Should Consider Variable Universal Life?
If you A) Need life insurance, B) Are willing to accept the risk of the stock market investing, and C) Are unwilling to commit to a fixed annual premium payment, you should consider a variable universal life policy. As with a variable life policy, if you already have a variable universal life policy and you no longer need the insurance, consider converting the cash value of your policy into a variable annuity.
Phew! We’ve covered a lot of ground here in the past four weeks. I trust you’ve found this journey through the world of variable annuities and alternatives to it valuable. That’s especially true now that a new year is here, and you’re likely planning how to maximize your investment returns and tax benefits for 2018 and beyond!
Now, here are a few parting words of advice to keep in mind:
1) Don’t consider purchasing a variable annuity until you first take advantage of company-sponsored retirement plans and IRAs. Then, if you need additional investments to save enough money for retirement, take a look at the tax-deferred choices available to you.
2) Depending on your level of stock market expertise and risk tolerance, you may find variable annuities to be just the thing. And if the concept of variable annuity investing sounds attractive … but you lack the time or inclination to get personally involved … you may want to consider hiring a financial planner or money manager to handle things for you.
3) If variable annuities sound too risky, a fixed annuity or indexed annuity will probably suit you better. Just don’t forget to periodically monitor the financial safety of the issuing insurance company. Otherwise, you’re taking unnecessary chances with your retirement nest egg.
4) Always shop around and compare one investment to another. There’s absolutely no reason to incur high costs, or suffer with poor returns, when there are plenty of good alternatives out there.
Of course, our goal at Weiss Ratings is to make all of this as easy as possible for you. You can check any insurer’s safety rating on our Weiss Ratings website. Plus, for much more detailed advice about these products, I strongly suggest you check out our Consumer Guide to Variable Annuities.
In this recently updated guide, you’ll learn the real truth about “guaranteed lifetime withdrawal benefits” … the 10 best (and 7 worst) variable annuities, according to Weiss Ratings … the critical steps you must take when evaluating a variable annuity … and much, much more. Just click here or call our customer service team at 1-877-934-7778 for more details.