Problems with Variable Life Insurance
The problem with Variable Life Insurance is that it is variable. How variable can it get? All the way–as in gone.
Variable Life policies have cash value that is invested in mutual funds. If the mutual funds do great, the insurance policy does great. But I’ll tell you, the policy will probably never do as great as the day you bought it. By that I mean, when you bought it the salesman showed a long-term rate of return between 9-12% (insurance agents are permitted to show up to 12%). You’ve got to understand, that rosy forecast has nothing to do with anything. It’s worse than a guess. It’s like a fortune teller who says, “I see a beautiful young woman, you are with her at the altar, and now there are children playing on a large estate in Italy. $100 please.”
Let’s dig deeper. You see that 9% return? How likely is it that you will get a 9% return every year? Impossible! The salesman says it is an average–fine. But if you are up 20% in year one, and down 10% in year two, are you averaging 10%? Nope. You are averaging 8%.
Another point: when the agent says the market “has averaged 9% over the last twenty years….” Alright, it did 9% from 1990-2010. But how did it do from 1985-2005? You’ll be surprised. You knwo why — because it’s Variable!
Even if the policy does great for years, you are never out of the woods. What happens if the stock market takes a dive when you are 80? Trouble, that’s what.
The purpose of life insurance is to protect you against tragedy in the future. If there’s a chance that protection won’t be there, what good does it do? Variable Life policies, in most scenarios, is a life insurance tragedy.