What is a major risk associated with Variable Life Insurance policies?

Variable Life Insurance policies come with the significant risk of market volatility impacting their cash value. This type of insurance allows policyholders to invest their premiums in a variety of investment options, such as stocks and bonds. As a result, the value of the cash component of the policy—and possibly the death benefit as well—can fluctuate based on the performance of these underlying investments.

When investments perform well, the cash value may increase, and policyholders can benefit from potentially higher returns compared to traditional whole life policies. However, the flip side is that if the market does poorly, the cash value can decrease, which could negatively affect the policyholder's financial strategy and planning. This variability represents a major risk, as policyholders must be aware of and prepared for the potential loss in value based on market conditions.

Other options do not highlight the inherent risks associated directly with Variable Life Insurance. Fixed premium rates, for instance, indicate stability rather than risk, while guaranteed death benefits offer a level of security regardless of investment performance. Low policyholder involvement does not directly impact the risks tied to the variable aspects of the policy. Thus, understanding market volatility is crucial for anyone considering Variable Life Insurance.