How do fixed and variable life insurance policies differ?

Fixed and variable life insurance policies differ primarily in how they handle premium guarantees and the accumulation of cash value. Fixed life insurance policies offer guaranteed premiums, meaning policyholders know exactly what they will pay each year for their coverage. The death benefit and cash value associated with these policies are typically stable and predetermined.

In contrast, variable life insurance policies allow for cash value to fluctuate based on the performance of investments chosen by the policyholder. This means that while the death benefit can also vary according to the performance of these investments, the premiums may not be guaranteed to stay the same over time. This introduces a level of risk and potential for increased return, but it comes with the uncertainty associated with market performance.

Understanding these differences is crucial for policyholders when choosing the right type of life insurance for their financial planning needs, as each type serves a different purpose depending on the individual's risk tolerance and financial goals.