Stock Market Crash: Variable Life Insurance Polices Face Risk

It's not just your portfolio that will feel the pinch because 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 been on the rise - currently accounting for up to 40 percent of life insurance premiums.

Michael Kortz, RFC, RR Insurance Agent from Orange County, California notes, "This type of policy has become increasingly popular 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 a Variable Life Insurance Policy Works

Variable life insurance builds cash value over time. The cash value of the policy is 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.

What differentiates this policy from a more traditional option is the dramatic fluctuation of a policy's 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.

Cash Value Decrease in Policy

Because variable life insurance is directly tied to stock market performance your policy's cash value may experience a decrease. Depending on which subaccounts have been selected, a policy could experience a 30-50% decline in policy value. "That would be devastating to the policyholder," comments Financial Advisor Michael Kortz, RFC, RR.

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 will 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," comments Michael Kortz, RFC, RR. "Regardless of what the stock market does, these policies are guaranteed to provide coverage as long as the level premiums are paid. People need to sleep at night. A policy that is rich in guarantees, and isolated from market ups-and-downs, could help them do that."