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Variable Life Insurance: Investment and Protection Combined

TeamAckoSept 27, 2024

Variable life insurance enhances traditional whole life coverage by allowing policyholders to invest a portion of their premiums into various investment funds, such as stocks, bonds, money markets, or alternative assets like real estate or gold. This introduces the potential for higher returns compared to the fixed interest rate of whole life policies but also brings the risk of market fluctuations impacting the cash value and death benefit

Variable

Contents

Pros	Cons
Life insurance coverage: Lifelong death benefit protection	Market risks: Fund performance impacts cash value and death benefit
Range of investment options: Invest in stocks, bonds, real estate, etc.	High fees: Comes with administrative, mortality, and fund management fees
Premium payment flexibility: Adjust premiums after 1st year	Limited flexibility: Cannot alter coverage amount after issuance
Higher returns: Potential to earn more than the whole life insurance	Surrender charges: Early policy cancellation may pay surrender charges, reducing returns
Tax saving: Cash value grows tax-deferred	Complexity: Several terms and conditions, such as investment options and associated risks

What is Variable Life Insurance?

Variable life insurance is like bundling an investment portfolio into your permanent policy. Unlike standard whole life insurance, which earns plain interest on your cash value, variable life lets you channel part of your payments into various shareable investment funds.

Instead of collecting interest, your cash value can shoot up if the funds do well. But if the market tanks, your cash value could get slammed, too. So, it brings higher risk into the picture.

The premiums, after the first year, are flexible within certain limits. One can scale premium payments up or down or even skip payments. This can impact the death benefit, so adequate funding must be maintained.

Let’s understand variable life insurance with an example:

Ravi, a 30-year-old Accountant, opts for a Variable Life Insurance policy to protect his wife and 1-year-old daughter financially.

Ravi chooses an INR 1 crore coverage Variable plan with a monthly premium of Rs. 10,000 over a 10-year lock-in period, aiming for long-term growth to achieve future financial goals.

The policy offers Ravi investment choices between equity, debt, and balanced funds. Based on his risk appetite and market outlook, he allocates 60% to equity funds and 40% to debt funds.

Over the years, Ravi’s investments under the Variable Life plan have grown significantly, creating a large corpus that can fund needs like his daughter's education or retirement.

Additionally, Ravi enjoys yearly tax benefits under Section 80C, reducing taxable salary by the annual premium amount. This further enhances Ravi's investible surplus.

In this manner, the Variable Life Insurance policy provides Ravi market-linked returns on policy funds while offering an INR 1 crore life cover, fulfilling insurance and investment needs in one comprehensive plan.

How Does Variable Life Insurance Work?

Variable life insurance is like a hybrid - it blends lifelong insurance coverage with customisable investments. Here's a simple guide:

Insurance Component

Investment Component

Policy Fees

Insurance Component

First and foremost, variable life policies pay out a tax-free death benefit to your listed beneficiaries if you pass away during the coverage term. Morbid but important!

When you first take out the policy, you lock in a minimum guaranteed death benefit amount. That original death benefit is set in stone as long as you keep paying your premiums.

But here’s the unique part - your death benefit can grow if the policy's investments perform well! So strong returns can mean better payouts for your loved ones down the road.

Investment Component

Part of the premiums go towards providing insurance coverage by covering administrative charges and mortality costs.

The remaining premium gets invested in investment funds chosen by the policyholder. These operate similar to mutual funds.

The cash value depends on the performance of investment funds. Higher returns mean higher cash value.

Policy Fees

Insurers levy certain policy fees and risk charges like:

Mortality and expense risk fees

Administrative fees

Fund management fees

So, the returns earned on the funds are net of these recurring fees.

5 Types of Variable Life Insurance

Different Variable Life Insurance Policies cater to different financial goals and risk appetites. Let's look at some of India's most popular types of Variable Life Insurance.

Unit-linked insurance plan (ULIP)

Indexed ULIP

Variable annuity

Endowment plan

Child plan

Unit-Linked Insurance Plan (ULIP)

A ULIP is a market-linked investment-oriented insurance plan that offers both insurance protection and the opportunity to invest in a variety of funds. Based on one's risk appetite, premiums can be invested in equity, debt, or hybrid funds. The returns are linked to the performance of chosen funds. ULIPs allow long-term wealth creation and provide tax benefits.

Indexed ULIP

An Indexed ULIP offers returns derived from the performance of a particular market index such as Nifty 50. Premiums get invested into funds that mirror the portfolio of the linked equity index. It provides upside potential of equity with downside protection of debt/fixed income funds.

In simple terms, it combines the potential for higher returns associated with equity investments (such as stocks) with the safety and stability provided by debt or fixed-income investments, making it a less risky investment option than other market-linked funds.

Variable Annuity

A variable annuity is a long-term retirement planning product that provides regular income through annuity payouts post-retirement along with life cover during the accumulation phase. One can invest across various funds during the accumulation years and then convert the corpus into annuity income after vesting to receive guaranteed income.

Endowment Plan

Endowment plans offer the dual benefit of life cover during the policy term and a lump sum on maturity if the insured survives the policy term. Premiums get invested in debt and equity markets to build cash value. It serves shorter-term needs like child education, weddings, etc., with a medium risk appetite.

Child Plan

Child plans are dedicated insurance solutions to financially secure a child's key future milestones like higher education or marriage. Premiums are invested in funds based on risk profile to build the required corpus over 10-25 years. It offers adequate life cover in case of the untimely death of a parent, along with maturity benefits.

Variable Life Insurance vs ACKO Life Flexi Term Plan

Parameter	Variable Life Insurance	ACKO Life Flexi Term Life Plan
Type of Policy	Market-linked investment-oriented insurance plan	Pure risk protection cover
Premium Payment Term	Whole life or limited pay terms	Limited premium payment term
Premium Amount	Significantly higher	Very affordable
Customisation	Some customisation of investment funds	Customise protection aspects like the sum assured, premium payment frequency, claim payout structure, etc.
Investment Fund Options	Yes, equity funds, debt funds, liquid funds, etc	Focuses only on core protection
Death Benefit	Variable as per fund performance	Large fixed amount
Maturity Benefit	Yes, lumpsum fund value paid less charges	No maturity benefit
Surrender Value	Yes, fund value less surrender charges	No surrender value
Tax Benefits	Premiums eligible for tax deductions under section 80C/10(10D)	Premiums eligible for deductions under section 80C/10(10D)
Flexibility	Some flexibility in paying future premiums	Offers unmatched flexibility to alter sum assured, premiums, policy terms, etc., as per changing needs
Eligibility	Medical tests required	Limited eligibility criteria
Risk Exposure	Investment risks involved	No risks; guaranteed benefits

ACKO Life Flexi Term Plan

ACKO Life Flexi Term Plan is a game-changer in the term insurance space, offering unmatched flexibility that caters to your evolving life situations. This innovative product adapts to your changing needs, providing peace of mind and ensuring your loved ones' financial security. Here's what sets it apart:

Adaptable Sum Assured	Flexible Policy Tenure	Flexible Payout Options
Will Creation Service	Affordable Premiums	Easy Claim Process

We understand that the last thing your family needs during difficult times is a complicated claim process. ACKO’s digital-first approach ensures that claims can be initiated online with minimal paperwork. With a proven track record of quick claim settlements, you can trust that your loved ones will receive the financial support they need without undue stress.

Variable Life Insurance Cash Value Growth

Cash value builds through disciplined long-term premium payments and investment earnings. While providing life cover, it is an asset backing the variable insurance plan.

What is Cash Value?

Cash value refers to the money accumulating over time within a permanent life insurance policy, such as variable life insurance, whole life insurance, etc. As we know, a part of the premiums paid goes towards insurance coverage, which covers administrative charges and mortality costs. The remaining money gets invested in market-linked investment funds as per one's selection. These funds accumulate over the years and constitute cash value.

The policyholder can borrow against this cash value later via loans for needs like children's education, marriage, etc. Many insurers allow up to 80-90% of cash value loans. Additionally, if the policyholder decides to surrender the policy mid-way, a surrender value is payable, which is the accrued cash value net of surrender charges.

How Does Cash Value Grow Over Time?

Let's continue Ravi’s example to see how the cash value of his variable life insurance policy can grow over the long-term tenure of 10 years.

Ravi regularly invests his total annual premium of Rs. 1.2 lakhs (Rs. 10,000 monthly) into a mix of equity funds (60% allocation) and debt funds (40% allocation) based on his risk appetite.

In the first 5 years, Ravi's equity fund investments deliver a healthy 12% average annual return, while his debt fund investments generate an 8% yearly return on average. By the end of the 5th policy year, Ravi’s total cash value climbs to Rs. 8.35 lakhs.

From year 6 to year 10, Ravi’s equity fund continues its strong run, generating about 15% annual returns. Simultaneously, his debt funds moderate to around 7% yearly return in line with prevailing interest rates.

By the completion of the 10-year policy term, Ravi’s cash value reaches nearly Rs. 22 lakhs on his total premium investment of Rs. 12 lakhs over the lock-in period.

This demonstrates how disciplined premium payment and wise investment fund choices allow the cash value to potentially achieve attractive market-linked growth in the long term under Variable Life Insurance policies.

Determine Which Policy Works For You

The choice between variable life insurance and ACKO Life Flexi Term Plan depends on your unique financial situation, risk tolerance, and long-term objectives. Consider your budget, coverage requirements, investment goals, and desired level of flexibility when making your decision.

Situation	Recommended Policy
Need lifelong coverage with investment options	Variable Life Insurance
Limited budget and short-term coverage needs	ACKO Life Flexi Term Plan
Prioritise flexibility to adjust coverage and tenure	ACKO Life Flexi Term Plan
Want to build wealth alongside insurance protection	Variable Life Insurance
Seeking a digital-first, hassle-free experience	ACKO Life Flexi Term Plan
Desire potential for higher market-linked returns	Variable Life Insurance
Uncertain about long-term financial obligations	ACKO Life Flexi Term Plan
Comfortable with taking investment risks	Variable Life Insurance
Prefer straightforward protection without market exposure	ACKO Life Flexi Term Plan
Have exhausted other tax-saving investment avenues	Variable Life Insurance
Seeking the most affordable term insurance option	ACKO Life Flexi Term Plan
Willing to manage and monitor investments actively	Variable Life Insurance
Prefer a simple, no-frills term insurance policy	ACKO Life Flexi Term Plan
Have a high-risk appetite and long-term investment horizon	Variable Life Insurance
Need the ability to change payout options as per needs	ACKO Life Flexi Term Plan

However, for average individuals, the ACKO Life Flexi Term Plan stands out in the Indian insurance landscape with its seamless digital experience and swift claim settlement process. For individuals seeking an economical and versatile term insurance policy, choosing ACKO Life Flexi Term Plan is a wise decision.

How to Buy Variable Life Insurance?

Here is an overview of the key steps to purchase a variable life insurance policy:

Sum assured: Determine insurance needs and coverage amount. Factors include income, expenses, loans, family members, etc. Online insurance calculators can provide estimates.

Explore plans: Evaluate variable insurance plans from leading insurance companies. Compare premiums, cash value accumulation projections, past fund performance, and ratings. Shortlist policies aligning closest to your goals.

Apply online: Fill out the proposal form. Provide personal, health, and financial information for assessment. The insurer will verify details and may ask for additional medical tests.

Medical check-ups: Undergo medical check-ups if asked for by the insurer. This evaluates health status.

Get Insurance Policy: Issuance of policy after financial underwriting and evaluation. The insurer specifies the applicable risk class, policy terms, and investment fund composition.

Select premium payment mode: Online, cheque, bank transfer, etc. The approximate turnaround is 2-3 weeks till policy issuance.

Who should consider buying a Variable Life Insurance Policy in India?

This type of insurance policy is suitable for individuals with a long-term investment horizon and willing to take market risks to achieve potentially higher returns. Here are some scenarios where Variable Life Insurance may be a good fit for you.

Long-term investment goals

Variable Life Insurance Policies are designed to provide long-term investment opportunities. If you have long-term investment goals and are willing to take market risks to achieve potentially higher returns, a Variable Life Insurance Policy may suit you.

High-risk appetite

Variable Life Insurance Policies carry market risks and are subject to market volatility. If you have a high-risk appetite and are willing to take market risks, a Variable Life Insurance Policy may suit you.

Tax planning

Variable Life Insurance Policies provide tax benefits under Section 80C of the Income Tax Act. If you are looking for tax planning opportunities, life insurance coverage, and investment opportunities, a Variable Life Insurance Policy may suit you.

Estate planning

Variable Life Insurance Policies can be used for estate planning purposes. If you want to pass on your wealth to your heirs tax-efficiently, a Variable Life Insurance Policy may suit you.

Retirement planning

Variable Life Insurance Policies can also be used for retirement planning. If you want to build a retirement corpus and are willing to take market risks to achieve potentially higher returns, a Variable Life Insurance Policy may suit you.

Additional Riders Available

Policyholders can enhance their base variable insurance coverage by opting for supplementary covers called riders for additional charges:

Waiver of Premium: On disability or critical illness, future premiums are waived while coverage continues. This ensures policy continuation.

Accidental Death Benefit: Pays an extra amount over the death benefit if death occurs due to an accident. As per the IRDAI, you can purchase an Accidental Death Benefit Rider with coverage up to three times (3x) the base sum assured of your life insurance policy. Click here to check out ACKO Life Accidental Death Benefit Rider.

Increasing Death Benefit: Gradually increase the death benefit by a fixed percentage to counter inflation.

Disability Benefit: Provides periodic income for a fixed term in case of total permanent disability due to accident or illness.

Learn about ACKO Life Accidental Total Permanent Disability Benefit Rider and stay financially secure if a major accident leaves you unable to work or care for yourself. Get extra funds for daily expenses, and we'll waive off future premiums.

Choosing the Right Variable Life Insurance Policy

Here are some tips for choosing the optimum variable life insurance policy:

Compare Illustrations: Check premium outlay projections, cash value accumulation, and death benefit estimates across different policies and insurers. Opt for projections best matching future requirements.

Evaluate Expenses: Factor in various fees charged and impact on investment returns - mortality charges, fund management charges, administration fees, etc. Choose lower-cost insurers.

Study Past Performance: Review returns of investment fund options over the past 5-10 years. Opt for funds with higher and more consistent returns based on your risk appetite.

Check Ratings: Choose a strong insurer with robust financial ratings. Opt for insurers that have the highest financial strength to meet future liabilities.

Reassess Regularly: Review your variable insurance plan periodically based on market conditions, returns achieved, and policy performance. Alter premium amounts or fund options if required.

Finding the sweet spot between optimum insurance protection and attractive market-linked returns at a suitable budget is vital in variable life insurance. An unbiased financial advisor can help make an informed decision.

Factors Affecting Variable Life Insurance Premium

Several factors influence the premium amount payable for a variable life insurance policy. Understanding these aspects helps in making an informed purchase decision.

Age: The policyholder's age is a crucial determinant of premium. Younger individuals generally pay lower premiums than older applicants, as they present a lower risk to the insurer.

Health Condition: The policyholder's health status significantly affects the premium. Pre-existing medical conditions, lifestyle habits like smoking, and family medical history can lead to higher premiums or even policy denial.

Gender: Women typically pay lower premiums than men for the same coverage, as they tend to have a longer life expectancy.

Sum Assured: The total death benefit amount chosen directly impacts the premium. Higher coverage levels translate to increased premiums to account for the greater financial risk assumed by the insurer.

Policy Term: The duration of the policy influences the premium. Longer policy terms generally result in higher premiums, as the insurer provides coverage for an extended period.

Premium Payment Term: The length of the premium payment period affects the premium amount. Shorter payment terms require higher premiums, while longer payment terms allow for lower instalments.

Investment Fund Options: The choice of investment funds and their associated management fees can impact the policy's overall cost. Funds with higher expenses may lead to increased premiums.

Riders: Optional benefits, such as accidental death coverage and critical illness protection, can increase your premium due to the additional coverage they provide.

ACKO’s unique optional add-on, the ACKO Life Critical Illness Benefit Rider, provides extra protection for 21 critical illnesses, including life-threatening common diseases among women, such as breast, cervical, fallopian and ovarian cancer.

Occupation: Certain high-risk occupations, such as those involving hazardous work environments, may attract higher premiums due to the increased likelihood of mortality.

Lifestyle Factors: Engaging in risky hobbies or activities, such as skydiving or motorsports, can result in higher premiums, as they pose a greater risk to the insurer. By considering these factors, insurers determine the appropriate premium for a variable life insurance policy based on the individual policyholder's risk profile. It is essential for potential policyholders to provide accurate information during the application process to ensure fair premium pricing and avoid policy disputes in the future.

Wrapping It Up

Variable life insurance provides lifelong insurance coverage coupled with potentially higher investment returns. Budget-friendly term insurance plans for most individuals sufficiently meet temporary family protection needs.

Variable policies are complex, with higher costs, investment risks, and stricter eligibility criteria. These are more suitable for high-net-worth individuals with larger budgets seeking market-linked growth under long-term horizons. Consulting a financial advisor is prudent before purchasing variable insurance.

Frequently Asked Questions (FAQs)

Below are some of the frequently asked questions on Variable Life Insurance

Can I change my investment options in Variable Life Insurance in India?

Yes, you can change your investment options in Variable Life Insurance in India.

What happens if I miss a premium payment on my Variable Life Insurance policy in India?

If you miss a premium payment on your Variable Life Insurance policy in India, your policy may lapse or become inactive.

Is Variable Life Insurance in India a good investment option for retirement planning?

Yes, Variable Life Insurance can be a good investment option for retirement planning, depending on your specific needs and financial goals.

How do I choose the right insurance company for Variable Life Insurance?

To choose the right insurance company for Variable Life Insurance in India, you should compare the features, benefits, and charges of different policies offered by different insurers.

Can I surrender my Variable Life Insurance policy in India before the maturity date?

Yes, you can surrender your Variable Life Insurance policy in India before the maturity date, but you may have to pay surrender charges, and you will receive a surrender value, which may be lower than your invested amount. It's best to review your policy documents or consult with your insurance company to understand the surrender process and its implications.

What’s the maximum coverage I can get for an Accidental Death Benefit rider?

As per the IRDAI, you can purchase an Accidental Death Benefit Rider with coverage up to three times (3x) the base sum assured of your life insurance policy.

What new options do I have for adjusting my premium?

As per the IRDAI, you can decrease the premium amount or sum assured of your life plan after 3 years instead of the previous restriction of 5 years.

Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on industry experience and several secondary sources on the internet, and is subject to changes.