We assume you are referring to a type of permanent life insurance — variable life — where the savings component is invested in a wide range of securities. Just to be clear about different types of life insurance, if you want insurance protection only (e.g., while your children are young and dependent on your income), consider buying a term life insurance policy that provides coverage for a specified period of time. If you want to build up savings within your policy, then you’re looking at a permanent policy — usually whole life, universal life, or variable life. Plan to hold these policies at least 15 years because canceling after only a few years can more than double your life insurance costs. Regardless of what type of policy you buy, READ IT CAREFULLY and check with your insurance agent or local library (a reference called Best's Reports) for information on the financial soundness of insurance companies.
As for your specific question, investment-linked policies are affected by the usual investment risk and return factors. Because of that, these policies often do not provide guaranteed cash values — and sometimes no guaranteed death benefit. You can choose from various investment funds, and a number of factors will affect your return. One is current interest rates, which will be reflected in the earnings of investments linked to the return on fixed-income securities. Another is stock market returns which will affect the return on equity investments, such as growth funds. A third key variable is the "fine print" in your specific policy which will describe how investment returns are calculated, minimum rates of return, fees, expenses, and other policy details. Inquire about the commission on this product. If you still have questions after reading your life insurance contract, contact the life insurance company or your local agent.
We would like your feedback on this Personal Finance Frequently Asked Question.
