Is a Variable Annuity Life Insurance Policy a Scam?
A special type of life insurance policy, called a variable annuity life insurance policy, allows you to invest in a life insurance policy while retaining death benefit coverage. Since this type of policy is unlike many other forms of life insurance, it is sometimes seen as a scam due to the complex nature of the contract. But, if you understand how the policy works, you won't be misled by variable life insurance salesmen.
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Significance
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Variable annuity life insurance is a type of life insurance policy that lets you invest the premium payments you make into mutual funds. These mutual funds can enhance the policy contract by increasing the death benefit and cash value of the policy.
Benefits
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Variable annuity life insurance policies give you an alternative way to save money for your retirement. The cash value account can be used as savings during your lifetime. You can withdraw money from your account or borrow against the value of the policy. Additionally, cash values accumulate on a tax-deferred basis and can be withdrawn from the policy or borrowed against tax-free.
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Disadvantages
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Variable annuity life insurance can experience a dramatic decrease in value over time. While the mutual funds may enhance the policy values, they can also deplete the cash value. Mutual funds come with fees which are charged to the cash value. Additionally, the policy itself has fees. If you are losing money in your life insurance policy and being charged fees on top of this, your policy's cash value could drop to zero. It this happens, your policy will lapse.
Warning
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If you lapse your policy and realize a gain, all of the money you've borrowed from your policy will be taxable. Borrowing from a variable annuity life insurance policy is a common practice. Life insurers often give preferred loans to policyholders so that they can take income from the policy on an interest-free basis. However, some policies do charge a small amount of interest. If this interest causes the policy value to fall to zero, or if you borrow too much money from your policy and the policy lapses, any amount above your premium payments made to the policy are considered taxable income.
Considerations
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Variable annuity life insurance isn't a scam. But you must fully understand your variable life policy. The variable policy is a complex life insurance policy. Be prepared to manage the mutual fund investments inside the policy. Understand all of the fees in the policy before buying it.
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