Extending Chapter 14: Health, Disability, and Life Insurance

What You'll Do and Learn

• You'll evaluate how the variable life insurance investment options you choose can affect the value of a variable life policy.
• You'll learn about the importance of asset allocation strategies in controlling risk and pursuing an appropriate return on your investments.

Introduction

In this activity you will learn about choosing investment options for variable life insurance policies and how your choices can affect the accumulated cash value of your policy.

Chapter Notes

In Chapter 14 you learned that there are several different types of whole life insurance policies. Whole life insurance is permanent insurance that you purchase by paying a constant monthly or annual amount, either for a set number of years or throughout your lifetime. A portion of your premium payment is invested in financial assets that are defined by the type of policy that you select. With variable life insurance, you are offered a choice of investment options, and the cash value of your policy will depend on the performance of the investments that you choose. Other forms of whole life insurance invest your premiums automatically in instruments that provide a guaranteed rate of return for a stated number of years.

Variable life insurance can potentially provide a higher cash balance and death benefit over time. However, there is also the possibility that your investments will lose money, leaving you with a lower level of protection than you might have hoped for. Diversifying your variable life policy investments among stock, bond, and money market investments can help reduce risk while providing potential for higher returns.

The percentage of your total investment that you allocate to each of these three asset categories is known as your "asset allocation." An appropriate asset allocation is determined based on your investment time frame and comfort level with investment risk. An asset allocation in which 70 to 80 percent of your total assets is invested in stocks is considered aggressive and is most appropriate for an investment time frame of 10 years or longer. If your investment horizon is less than 10 years, you may want to allocate more of your portfolio to bond and money market investments.

Site Notes

Standard & Poor's Asset Allocation calculator can help you develop an asset allocation strategy for long-term goals based on your financial situation and your ability to tolerate fluctuations in the value of your investments.

Let Me Try

Go to the S&P site then print the Worksheet activity.

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