Stock Market Crash Impacts Variable Life Insurance Polices

More than just your portfolio will feel the pinch of the recent stock market crash. Your variable life insurance policy may also be in danger of taking a downward spiral. Variable life insurance policies have experienced increased popularity - currently accounting for 40 percent of life insurance premiums.

One advisor notes, “This type of policy has become increasingly attractive because of the substantial tax advantages and larger cash value gains. However a variable life insurance policy exposes you to a higher risk because your policy’s value is directly tied to the investments you make.”

How Variable Life Insurance Policies Work

Variable life insurance develops a cash value over time. The cash value of the policy may be invested in a variety of different accounts, similar to those found in a 401(k). The mix of investments is completely at the discretion of the policy holder, and many policy owners select an all equity allocation. This subjects the policy to dramatic fluctuation of its cash value. Stock market gains can result in a rise in cash value which can lead to a cash rich policy. However, large market losses could result in negative consequences.

Polices in Danger of Collapsing

Many variable life insurance policies have been minimally funded in hopes that stock market gains will help fund their policy. A large amount of policies were sold with the assumption that the stock market would consistently provide big returns. But with the recent stock market plummet these policies face serious risk. Depending on which subaccounts have been selected, a policy may experience a 30-50% decline in policy value which could be devastating to the policyholder.
Protecting your Policy from Market Risk

There are strategies you can implement to protect your life insurance policy from lapsing. Understanding your choices in these tough economic times will assist in protecting your investment.

1. Ramp up funding. Funding your existing policy at a much higher level can make up for the “evaporation” of your cash value. This will help keep your policy in force, and possibly avoid a policy lapse.

2. Reduce the death benefit. Reducing your policy’s death benefit may allow you to keep your premiums at their current level. However, this tactic may expose you to surrender penalties, especially if your policy is relatively new.

3. Invest in a fully-guaranteed policy. Switching your life insurance to a fully-guaranteed policy will protect your policy and cash value from lapses regardless of market conditions.

Understanding the correlation between the stock market’s downward spiral and your variable life insurance policy is important. Evaluating your current policy and making the necessary changes can salvage your investment and protect from future risk.

For those who own a variable life insurance policy, it might be time to consider one of the newer fully guaranteed universal life policies. Regardless of what the stock market does, these policies are guaranteed to provide coverage as long as the level premiums are paid.