STRATEGIC CONSIDERATIONS OF VARIABLE AND UNIVERSAL LIFE INSURANCE

People sometimes refer to whole life policies as a "forced savings program" because of the rigid premium schedule. You pay your life insurance premiums and save for the future while you're at it. Variable and universal life policies have a similar benefit and provide increased flexibility.

With all cash value life insurance, your account's earnings are tax-deferred, which enables the cash value to grow more efficiently. One of the often-overlooked benefits of this tax-deferred growth is that it provides essentially tax-free dollars that can be applied toward paying the insurance costs. The higher potential return rates of variable life do provide some inflation protection as well. You can even borrow cash from your account on very favorable terms, and within certain limits, you can even withdraw cash on a tax-free basis. As in the case of all life insurance, the death benefit is usually free of income taxes.

There are drawbacks to consider, however. The cost of the life insurance coverage included with these policies may be higher than if you were to buy the same coverage in a term insurance policy, usually depending on the length of your time horizon. You are taking on market risk by participating in the separate investment accounts, which are generally not guaranteed. There are usually stiff surrender charges by the company for cash withdrawals in the early years, and unpaid loans can sometimes generate income taxes at the death of the insured.

Let's summarize what we've learned.