Everything You Should Know About Variable Life Insurance

When you hear the term life insurance, it is pretty simple to imagine a safety net for your loved ones—a guaranteed# sum cushioning their finances for when you are no longer around. But what if there was a type of insurance that secures this protection in addition to permitting your money to grow? That is variable life insurance. Unlike other typical insurance policies, this option does more than afford peace of mind; it can create a substantially better opportunity.

Here, you have a savings account that gradually steadily accrues wealth, and your family will receive the full sum, i.e. the sum assured and the balance in the savings account. That's basically how variable life insurance works—it can ensure that you won't worry about wondering, "Is my policy enough?" as you secure your loved ones while growing the value of your policy over time in a flexible and manageable way.

In this article, we are going to dig into everything you need to know about variable life insurance-from how it works, its risks, and its rewards-by the end of which you will see why this insurance might just be a game-changer for your financial planning.

What Is Variable Life Insurance?

Under the IRDAI circular^[1], variable life insurance is classified as a non-linked life insurance that provides financial protection in case of death. The policy comes with a guaranteed# death benefit and a policy account balance that accrues over a period of time. Unlike unit-linked insurance plans*** that invest based on the movements of the stock market, variable life is independent of market fluctuations.

How Variable Life Insurance Works?

The mechanics of variable life insurance are pretty simple. When you pay your premium, some of it pays the cost of insurance, and the balance is credited into the policy account. After subtracting any applicable charges, such an account accretes at a guaranteed^# rate. This may be augmented, over time, with bonuses credited to the policies by insurers in order to increase the balance.

This plan covers only mortality and death-related contingencies. Therefore, it covers the risk only up to the extent of mortality as per the IRDAI circular^[2]. The sum assured shall be at least ten times the premium paid annually. In case you die with a live policy, your nominees will get the guaranteed# sum assured in addition to the balance in your policy account.

You can also top-up the sum assured during the policy term, but any change will be in effect from the next policy anniversary. There are regular statements from the insurance company to keep you abreast of your account balance and its growth.

To understand this policy better, let’s take the help of an example-

Example Of Variable Life Insurance

Let's consider an illustration where Aryan purchases a variable life insurance policy with the following features:

• Sum Assured: ₹20,00,000
• Annual Premium: ₹1,50,000
• Policy Term: 25 years

From the policy structure perspective:

• Death Benefit: On the death of Aryan during the policy term, his nominees would receive ₹20,00,000 (the sum assured) along with the balance in the policy account accumulated up to that date.
• Maturity Benefit: If Aryan survives until the end of the policy term, he will receive the accumulated balance in the form of a policy account together with any terminal bonus declared by the insurer.

How To Buy Variable Life Insurance?

Now that you're interested in this flexible insurance option, how do you go about buying a policy? Here's a stepwise breakdown:

• Determine Your Needs: Determine how much coverage is suitable for you and what you can afford in terms of premiums. This is crucial because you want to strike that balance of being adequately covered without breaking the bank.
• Carry Out Research And Comparison: Compare the different plans available to see which one offers the best benefits, guaranteed# rates, and bonuses.
• Make A Selection: Based on the research that you have conducted, pick a variable life insurance plan that suits your needs and financial goals for protection.
• Submit An Application Form: Once you select a policy that you like, you'll need to fill out an application form. This form requires personal, medical, and financial details.
• Medical Examination: Some plans require a medical check-up for the application to be approved.
• Get Approved: After your application is approved, the policy is issued, and premium payments begin.
• Review Policy: Review the terms, conditions, charges, and how your policy account will accumulate.

What Are The Tax Benefits^$ Of Variable Life?

The premiums paid towards variable life insurance qualify as a deductible under Section 80C of the Indian Income Tax Act. Therefore, you are allowed to claim up to ₹1.5 lakh per year by way of deduction, which might even reduce your tax burden. Moreover, the payout you or your beneficiaries will receive is tax-exempt under Section 10(10D)** of the Income Tax Act, provided it meets all the conditions stipulated by the Income Tax Act.

The double tax advantage* variable life insurance offers makes it all the more appealing to potential investors who seek security along with a tax-efficient investment vehicle.

What Are The Risks Of Variable Life Insurance?

Like any other investment tool, variable life insurance presents certain risks. Although appealing, there are numerous factors to consider in this regard:

• Charges And Fees: When you pay your premium, various deductions, like administrative fees and mortality charges, are applied. These can possibly affect the return on your policy account.
• Lesser Growth: Being a non-linked policy, growth in your policy account is based on guaranteed# rates and bonuses, which might not be as high as that in market-linked returns.
• Covered Only For Death-Related Contingencies: Variable life insurance only offers protection for death-related contingencies and does not provide cover for events like critical illness or disability. This could severely limit its use in some situations.
• Limited Flexibility: You can modify the cover amount in force within the term of the policy, but any change does not take effect until the next anniversary of the policy, thus limiting the flexibility factor

Knowledge of these risks will enable you to make a more informed decision about investing in variable life.

Wrapping It Up!

Variable life insurance is a nice balance of having enough life coverage plus saving money. It allows your money to grow safely so that it protects your family's finances. Moreover, though not being as dynamic as stock market-linked policies, variable life insurance has security with guaranteed# growth, which is especially good for a risk-averse person. In a world fraught with financial uncertainties, isn't it reassuring to be able to build up a protective cushion that grows in time? Knowing how variable life insurance works, its tax benefits^$ and its inherent risks will help you decide whether this policy will meet your long-term financial goals.