The Insurance scenario belonging to both Life coverage and general risk cover categories- has undergone a sea-change in US over the last two decades. The age-old varieties had lost its popularity and new, well- defined products started making their presence felt, out-elbowing the conventional ones. The hikes of Term Life insurance were close-ended schemes, terminating after a given period on maturity. Once the policy term matured, the account used to be closed and the insured had no recourse to it after the due settlement of claim, or, the pay-off of the endowed sum (whichever was earlier). It did not permit internal adjustment of funds because it contained no provision or built-in system of value generation over and above the basic ritual of premium clearance. But, the recent innovative products in the Insurance domain have successfully showcased new ideas where fresh value build-up is contemplated along with premium payment. Variable Life Insurance inter alia, is one such breakaway scheme that combines the elements of social security with resource generation.
Variable Life Insurance (VL)
The scheme is a well-conceived departure from the erstwhile Life Insurance-cum-Endowment scheme from which it derives. Such stereotyped policies consisted of no permanent usage. The policy account used to be closed upon settlement of claim or refund of the endowed sum, whichever turned up first.
But a variable Insurance embodies a contract that provides permanent protection to the beneficiaries upon the death of the policyholder. It does not warrant refund of any endowed sum on the so-called maturity of the policy. Rather it focuses of fresh value build-up by way of extra deposits (over and above stipulated premium) in a subsidiary cash account run simultaneously with the policy account. Once a sizeable value-base is created, it shifts matching funds to equity-linked 9investments, thereby ensuring the maximum return to the policyholder. In other words, you as a policyholder have the freedom to allocate a certain portion of your extra premium payment to such speculative channels. Maintaining such multi-faced account may prove a bit expensive for a while, but the entire process is worth it as your invested money multiplies through judicious onward investment on shares, bonds, mutual funds, money-market etc.
While your decision in the matter of such risk-prone allocations shall be complied with, Stock Market managers would keep round-the-clock vigil on plausible investments and optimum return. As an additional protection, variable policies are categorized under ‘security contracts’ monitored and supervised by statutory authorities of Federal La enforcing wing of the U.S. Government. Any deployment of your funds in the speculative space, therefore, must be backed by requisite company brochures or similar explicit security documents.
And, interestingly enough, you are relieved of immediate tax tags arising out of aforesaid investment returns as long as you choose to run the policy. That income generation does not entail tax obligations as in the eyes of extant I.T/Wealth Tax regulations; they cannot be classified as direct income or wealth creation. Such un-tagged income shall go to the benefit of your survivors, though!
Moreover, you can divert such capital build-up towards premium servicing in your policies thereby reducing your worries about premium pay-offs.
Since your cash value is developed in speculative areas, you are well-advised to maintain close liaison with the Stock Market personnel of the Insurance Company you are dealing with. Lay your hand upon whatever investment documents you are supplied with before striking a decision about any prospective allocation. This is because a dismal performance of your investment may tell upon the overall maintenance of your policy due to poor income generation and internal fund adjustments. In extreme cases, your ultimate cash or death benefit may get reduced in the process, though not below the prescribed level.
Variable Universal Life Insurance (VUL)
This scheme is a unique blend of the foregoing Variable Insurance and Universal Life (UL) scheme, combining the advantages of both.
Essentially, a variable Universal Life Insurance is Variable –cum Flexible Life Scheme in its new avatar! It combines the dual benefits of stock investment and alteration of the insurance terms by the policyholder to their prevailing needs. The overall coverage, as well as the premium amount and frequency, can be altered as best suited to the policyholder from time to time subject, however, to certain limits. Premium can be paid in advance in lump sum, or your accrued cash value can be sourced for premium adjustment.
As for the risk factors involved in stock investment allocation (partial) out of your account, – brochures, prospectus, and all such statutory investment documents must be read carefully before giving the nod to your stock-market managers so as to be on the safer side of things. They will never take a decision in this behalf without securing your prior consent. This aspect has already been dealt with at length in the preceding sub-section (VL).
Much more than being a financial contract, Life Insurance embodies social security. Its real implication far outreaches its face value. When a policy defaults in premium payments due probably to some un-foreseen constraints faced by the policy holder, its security status suffers and the prospect of a smooth and timely settlement looks remote. With the introduction of Irrevocable Life Insurance Trust (ILIT) IN us, sticky or under-serviced Life Policies have jolly good reasons to look up for a respite! The entire control and supervision of Insurance activities is no longer the concern of individual Banks or agencies; it has come to be vested in a statutory Government agency named above (ILIT). A common capital pool is created to ensure the paramount benefit to a vast majority of clients. This has further enabled individual operators (risk carriers) to compare insurance costs maintained by each of them with those incurred by the other. Under-serviced policies no longer lie defunct under age-old ‘paid up’ clause; rather remain in force upto a minimum guaranteed period even if their cash value base stands eroded.
This benevolent and client-friendly fiduciary measure has further armed the Insurers with several ‘fall back’ options in managing exigencies.