Insurance

innovation in life insurance that allows policyholders to invest the cash value of the policy in stock, bond, or money market portfolios. Investors can elect to move from one portfolio to another or rely on the company's professional money managers to make such decisions for them. As in whole life insurance, the annual premium is fixed, but part of it is earmarked for the investment portfolio. The policyholder bears the risk of securities investments, meaning that cash values and death benefits will rise if the underlying investments do well and fall if the investments drop in value. Some insurance companies guarantee a minimum death benefit for an extra premium. When portfolio investments rise substantially, policyholders can use a portion of the increased cash value to buy additional insurance coverage. Policyholders can borrow against the accumulated cash value or cash in the policy. As in an Individual Retirement Arrangement, earnings from variable life policies are tax deferred until distributed. Income is then taxed only to the extent it exceeds the total premiums paid into the policy. Death benefits are not taxed as individual income but as taxable estate income, which carries an exclusion of $2 million, rising to $3.5 million in 2009.

Variable life insurance is different from universal life insurance. Universal life allows policyholders to increase or decrease premiums and change the death benefit. It also accrues interest at market-related rates on premiums over and above insurance charges and expenses.