Fixed-Premium Variable Life-Special Applications

Jack bought his $100,000 fixed-premium variable life policy in 1980 at the age of 42. His required monthly premium is $185, which he has maintained over the last 20 years. The policy has provided life insurance protection for his family, which increased over time to the current level of $219,910.

He has borrowed on his policy at times to buy cars, to pay for college education for his children, etc., so its living values have served him well in times of need. The policy now has an asset value of $106,000. His investment of $185 per month has provided not only the benefits of a life insurance death benefit and cash without taxation in times of need, but also a compound net cash-on-cash rate of return of over 8 percent.

Jack said that if his bill of $185 per month had been optional (as in variable universal life) rather than fixed (as in variable life), he just might not have made the same effort to make the payment and thus might not be in the happy situation that he is in now. A required premium has served him well.

Single-premium variable life is one form of variable life that is very useful for what we might call earmarked money. That means the money is being set aside for a special person or reason.

For example, Aunt Sue has $10,000 that she wants her niece to receive at her death. Where can she invest the $10,000 and have it compound for her lifetime without creating income taxes for someone, all the while having it private and knowing that it will go to her niece when the time comes? Investing the $10,000 in a single-premium variable life policy on her life with her niece named as the beneficiary will accomplish her purpose quietly and conveniently without legal documents or expense.

The slippage, or expense, caused by the life insurance benefit cost may be no more than the income tax cost might have been if the money had been invested in taxable mutual funds. Fixed-premium variable life lacks flexibility of premium and face amount. Variable universal life, introduced in 1985, brought both flexibility of premium and death benefits to the variable life policy.

As we discuss variable universal life insurance, keep in mind that when you move from a fixed premium variable life contract to a variable universal life contract, you are exposing yourself to an additional downside risk. You may have to pay a higher premium to keep the variable universal life contract in force than the guaranteed level premium in a variable life policy if expenses and mortality costs increase to the maximum contractually allowable level and investment results are negative.