Final answer:
Variable life insurance offers policyowners the chance to earn higher interest rates through a variable interest rate linked to the insurer's separate account's investment performance. While more traditional assets offer stability and fixed returns, variable policies incorporate the potential for higher returns with greater associated risk.
Step-by-step explanation:
With variable life insurance, policyowners have the opportunity to earn higher interest rates. The interest rate is variable because it is linked to the insurer's separate account, which fluctuates according to its investment performance. Insurance companies primarily generate revenue from insurance premiums and investment income, investing in relatively safe and liquid assets.
However, through a variable life insurance policy, part of the premiums are invested into a separate account that includes a variety of investment options, such as stocks, bonds, and money market funds. This can potentially lead to a higher rate of return compared to conservative investments, but with an added element of risk. Unlike traditional life insurance, which offers a fixed return, the returns on a variable life policy are directly tied to the performance of the investments within the separate account.
When individuals supply financial capital through saving, they expect to receive a rate of return, reflective of the profit on their investments. Various forms of investments, which can include bank accounts, bonds, stocks, and mutual funds, differ in terms of the expected rate of return, risk, and liquidity.
The mechanism of earning on a variable life insurance contrasts with earning interest in a savings account, which is considered a private rate of return and is typically much more stable, though often lower, than potential returns from a separate account linked with variable life insurance.