What is variable life insurance?

This form of permanent life insurance lets you invest your policy’s cash value

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Variable life insurance is a form of permanent life insurance, which is intended to last for a lifetime. As with other forms of life insurance, a variable life policy represents a contract between an individual and an insurer. The insurance company agrees to pay a tax-free death benefit to the beneficiary (or beneficiaries), provided the premiums have been paid and the policy is valid.


Key insights

Variable life insurance (VLI) allows you to choose how your policy’s cash value is invested.

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Premiums are level and the death benefit is guaranteed, unlike with some other forms of permanent life insurance.

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Some forms of VLI allow you to supplement the death benefit with your policy’s cash value.

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What is variable life insurance?

Variable life insurance, similar to whole or universal life insurance, is a form of permanent coverage — meaning the policy doesn’t expire after a certain number of years. It remains in effect for as long as the insured person is living, provided premiums are paid regularly. Premiums are fixed and are due on a regularly scheduled basis.

The death benefit is guaranteed and will be paid tax-free to your beneficiaries.

As with other types of permanent life insurance, a variable life insurance policy contains a savings component that can accumulate cash value on a tax-deferred basis, which the policyholder can then access in the form of withdrawals or loans. However, any such deductions can reduce the death benefit if not repaid.

If you have a “face amount plus cash value” variable life policy, the cash value can be used to supplement the death benefit.

What makes a variable life insurance policy unique is that it allows policyholders to direct how that cash value is invested in a portfolio of stock, bond or mutual funds. This offers the potential for greater growth while still guaranteeing a minimal death benefit. What’s more, you can direct the cash value into subaccounts to take advantage of multiple investments.

“It's important to note that variable life insurance may not be suitable for everyone, as the investment aspect carries the risk of potential loss of cash value if investments underperform,” cautioned Daniel Ray, a licensed insurance agent in Jacksonville, Florida, and founder of PinnacleQuote. “Safer alternatives like whole life or universal life insurance may be better suited for those seeking more stable returns.”

Variable life insurance vs. variable universal life insurance

Variable life insurance (VLI) should not be confused with variable universal life insurance (VUI), another form of permanent coverage. Both types of insurance offer the option of investing in securities rather than providing a fixed rate of return.

But while premiums are fixed and the death benefit guaranteed with VLI, a VUI policy has adjustable premiums and a death benefit that is not guaranteed.

“VLI is ideal for individuals seeking life insurance coverage while also desiring the potential for increased investment returns, making it a suitable option for those comfortable with investment risks,” said Ray.

How variable life insurance works

Most of your variable life insurance policy premium goes toward two things: the death benefit and the savings component (aka the cash value). A minor amount goes toward any fees or charges associated with policy management.

The money that is allocated for investing goes into an account, from which it can be invested into securities such as stock and bond funds. You may also have the option of investing in a fixed-rate money market account.

For example, let’s say you’ve purchased a variable life insurance policy with a $100,000 allocation toward the cash value. You invest 50% of that money in a mutual fund with a variable rate of return and 50% in a money market account that offers a fixed rate of 3%.

At the end of the year, your fund has returned 10%, giving you a profit of $5,000. Your mutual fund has returned $1,500.

All told, you have $6,500 more cash value than you did at the start of the year, minus any applicable taxes, fees or other charges.

If the market does well, your VLI may enjoy a rate of return significantly higher than a fixed-rate account. But if the market does poorly, so will your investments — diminishing your cash value and leaving less money for you to withdraw or borrow against.

“VLI offers a powerful blend of protective benefits and investment growth potential, accompanied by enticing tax advantages,” Ray said. “However, it's crucial for individuals to carefully evaluate the risks and align them with their financial goals and risk tolerance before considering VLI.”

What are the tax benefits of variable life insurance?

As with other forms of permanent life insurance, a variable life insurance policy’s cash value grows on a tax-deferred basis. Ordinarily, you will not be subject to income tax penalties unless you withdraw money from your account.

If you choose to borrow against the cash value, that sum will not be subject to income taxes in most cases unless you don’t repay the loan amount.

When you die, the policy’s death benefit will be paid to your beneficiaries on a tax-free basis in most cases.

Pros and cons of variable life insurance

If you want a life insurance policy that offers lifetime coverage with predictable, regular premiums and a death benefit that’s guaranteed, plus you want a say in how your policy’s cash value is invested, a variable life insurance policy may be a good option.

As with other securities-based investments, however, there is a risk of loss, which can diminish your cash value.

If you prefer a life insurance policy that doesn’t require active management on your part, or if you prefer the predictability of a fixed rate of return, a whole life insurance policy may be a better option.

Pros

  • Range of cash value investment options
  • Guaranteed death benefit
  • Opportunity for high rates of return

Cons

  • Requires more participation on your part than other types of permanent life insurance
  • Withdrawals or loans can diminish death benefit amount if not repaid
  • Returns are subject to market risk, losses

How variable life insurance compares to other types of life insurance

There are other types of life insurance to choose from if you decide that variable life insurance isn’t the right option for you. Talk to a professional about whether variable life insurance or another kind of life insurance is the best for your needs.

Variable life insurance vs. term life insurance

Term life insurance lasts for a specific period of time, typically five to 30 years — meaning once the term expires, the policy is no longer in effect. Variable life insurance, on the other hand, is permanent. Also, unlike permanent life insurance, a term life policy does not contain a savings component that can accrue cash value.

Similar to variable life insurance, term life has fixed premiums in most cases, and the death benefit is guaranteed.

Variable life insurance vs. whole life insurance

Whole life insurance is another kind of permanent life insurance. Like variable life insurance, it comes with a fixed premium and guaranteed death benefit in most cases. The policy’s cash value is invested in a fixed-rate account that offers a guaranteed, low rate of return.

Variable life insurance vs. universal life insurance

Universal life insurance is also permanent life insurance. However, unlike whole life or variable life, the typical universal life insurance policy has an adjustable premium and death benefit.

In some cases, the cash value can be invested in stock or bond funds, similar to a variable life insurance policy.

Unlike other permanent coverage, a universal life policy’s death benefit is not guaranteed.

» MORE: Term vs. whole life insurance

Where to buy variable life insurance

Generally speaking, you have three options for buying a variable life insurance policy:

  • Directly from the insurer, typically via its website or by telephone
  • From a company representative or agent if it’s a company such as State Farm, which makes you work with a local agent in order to get a quote and purchase coverage
  • From an independent agent or brokerage, which can give you quotes from several insurers, potentially offering more options and savings

Note that not all companies that sell life insurance policies offer a variable life insurance option.

» COMPARE: Best life insurance companies

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FAQ

Is variable life insurance risky?

Yes, the savings component of a variable life insurance (VLI) policy does carry more risk than, say, a whole life insurance policy with a fixed return. This is because the cash value of a variable life policy can be invested in stock, bond and mutual funds, and all securities are subject to market fluctuations. In addition, a VLI policy often is subject to a variety of fees, which also can add up over time.

What are the investment options available with variable life insurance?

Investment options vary from company to company and by policy. But generally speaking, a variable life insurance policy will offer a number of investment options, including a predetermined number of stock and bond mutual funds as well as lower-interest money market accounts.

How does borrowing cash value from variable life insurance work?

As with other types of permanent life insurance, you can borrow against the cash value of a variable life insurance policy. These loans are not subject to federal income tax regulations the way withdrawals are, but they may be subject to interest charges. If you do not repay the amount you borrowed and your policy terminates because of insufficient funds, you may end up owing taxes on the unpaid sum. Likewise, outstanding withdrawals can diminish your policy’s cash value and death benefit.

Bottom line

Variable life insurance is a form of permanent life insurance, with a fixed premium and a guaranteed death benefit. VLI may be a good option for someone seeking lifelong coverage who wants the predictability of regular premium payments and a guaranteed death benefit, plus the option of having a say in how the policy’s cash value is invested.

These investments can produce a greater return than a whole life insurance policy but are subject to market volatility. A variable life insurance policy may not be the best option for someone who prefers a guaranteed rate of return.


Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
  1. FINRA, “Investment Products: Insurance.” Accessed March 22, 2024.
  2. Investor.gov, “Variable Life Insurance.” Accessed March 22, 2024.
  3. Fidelity Life, “What is Variable Life Insurance?” Accessed March 22, 2024.
  4. Prudential, “What Is variable life insurance?” Accessed March 23, 2024.
  5. Thrivent, “How variable universal life insurance works: features, pros, cons, and more.” Accessed March 23, 2024.
  6. The Hartford, “Captive Agent vs. Independent Agent.” Accessed March 24, 2024.
  7. Texas Department of Insurance, “How do I find an insurance agent?” Accessed March 24, 2024.
  8. Insurance Information Institute, “Facts + Statistics: Distribution channels.” Accessed March 24, 2024.
  9. Insurance Information Institute, “Life Insurance Basics.” Accessed March 24, 2024.
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