Variable life and variable
annuity sub-accounts: The more the merrier?
When you invest in a variable life
insurance policy you have many choices to make.
Many life insurance companies offer numerous sub-accounts
with their variable annuities. The sub-accounts are the investment choices
you can make. They are similar in nature to mutual funds.
There are many options in diversifying your variable annuity
with many of the sub-accounts featuring aggressive growth funds. You
should choose your sub-account investments wisely, as the cost of keeping
a variable life or variable life insurance policy can be quite high.
What are sub-accounts?
When you purchase a variable universal life insurance
policy, your premium payments go into a separate account, which consists
of variable sub-accounts. These sub-accounts are used to invest your
premiums into underlying portfolios. The portfolios are made of stocks,
bonds and money market instruments.
Due to the fluctuation of the investments, your cash value
will fluctuate. Fees will be subtracted from your cash value to pay the
policy's monthly charges. The fees include a charge for the cost of your
life insurance. The policy is in force as long as the cash value of the
policy is enough to pay the monthly charges.
You can withdraw part of the cash value or loan against it,
but enough money must stay in the cash value to pay for the monthly
charges. If the money starts to run out, the insurer will ask that you pay
higher premiums or surrender the policy. The performance of your
sub-accounts is essential to keep your policy going.
When you purchase a variable annuity, your money is invested
into a separate account made of variable sub-accounts. When you annuitize
your annuity and begin to receive payments, the payments you receive will
be based on the performance of your sub-accounts. If they do well, you are
paid well. If they do poorly, you are paid little.
The risk of variable products
There are thousands of sub-accounts for variable life,
variable universal life and variable annuities. These sub-accounts give
consumers a wide array of fund choices for diversification.
Experts say that diversification is the key to protecting
your investments. You should consider splitting your investments between
conservative sub-accounts and more aggressive ones.
Most importantly, your annuity should represent your
individual needs. If you are older, you may need a more conservative
allocation. If you are young, you may have time to be aggressive.
Insurance specialists do warn against investing in too many
growth funds. Your life insurance policy isn't the best investment option
you have.
