Final answer:
Variable life insurance has fixed premiums and a guaranteed minimum death benefit, but can offer higher potential interest rates to protect against inflation. It includes a cash-value account which can grow and provide financial stability for policyholders, particularly as a hedge against inflation.
Step-by-step explanation:
Variable life insurance provides permanent protection; it has fixed level premiums and a guaranteed minimum death benefit, just like ordinary whole life, but differs in that it offers the potential for higher interest rates, aiming to protect the policyowner against the effects of inflation. These policies include a cash-value component that can accumulate over time and can be used by the policyholder. The ability to accumulate cash value at a rate that may exceed inflation is one of the unique features of variable life insurance, allowing policyholders to address the potential erosion of purchasing power due to inflation.
Similarly, instruments like indexed bonds can provide returns that are guaranteed to be above the inflation rate, providing retirees with financial products that help preserve their purchasing power in the long run. Understanding the effects of inflation is crucial, as even low inflation can have a significant impact on those with fixed incomes, such as pensioners, as it can compound and lead to a substantial loss of buying power over time.