A Guide to Variable Life and Variable Universal Life Insurance

Variable life insurance and variable universal life insurance require buyers to tread lightly, as these policies are complex.
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Written by Andrew Marder
Lead Writer
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Reviewed by Tony Steuer
Life insurance expert
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Edited by Georgia Rose
Lead Writer
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Variable life insurance and variable universal life insurance are types of permanent coverage that allocate cash value to investment subaccounts. They’re designed for people who:

  • Plan to pay active attention to their life insurance.

  • Can fund a policy heavily in its early years.

  • Are willing to add stock market risk to their life insurance.

For those people, variable life and variable universal life offer the most potential growth of any type of life insurance — but they also come with some of the biggest risks.

What is variable life insurance?

Variable life insurance is a permanent life insurance policy with a fixed death benefit: the amount paid when you die.

Variable universal life insurance, often called VUL, has a flexible death benefit and adjustable premium payments.

Both types of insurance rely on mutual fund-like subaccounts that you choose. That means more risk and more potential for growth compared with other permanent insurance options, like whole life or universal life insurance.

How does the cash value work?

Like all permanent life insurance, variable life and variable universal life policies come with cash value. You pay your premium — the cost of insurance and other fees are taken out — and the rest is added to your cash value.

With any “variable” policy, you’ll be able to choose how your cash value is allocated, with some limitations. Your insurance company will let you know your options, and then you can choose based on your investment strategy.

If these subaccounts do well, you’ll increase your cash value. If not, your cash value will decrease. If the cash value exceeds a certain amount, the life insurance death benefit will increase. Note that if the cash value reaches zero, your policy may terminate. In addition, variable universal products often don’t come with a guaranteed death benefit.

If you’re thinking about buying either version of variable life insurance, make sure you understand the risks and policy structures before making a purchase. When buying any permanent life insurance policy, it’s helpful to consult a fee-only life insurance consultant who can help you understand all the financial implications of a policy.

Differences between variable life and VUL insurance

Variable life insurance and VUL both have cash values that vary with the performance of an underlying portfolio of investments. They also share some other traits, such as:

  • Control over what your cash value is invested in.

  • Return rates without caps.

  • Increased reliance on your investing experience.

  • The chance your investment subaccounts could drop in value.

While there is some overlap, variable life and VUL are different products. Variable life is more like whole life insurance, while variable universal life is more like universal life insurance.

Variable universal life insurance at a glance

Of the two “variable” options, variable universal life is the more popular. That doesn’t mean it’s wildly popular in general, though. In 2021, VUL made up just 12% of U.S. life insurance sales by premium

These are products for investors who are comfortable with riskier life insurance products. Most buyers will be better off — and may sleep more soundly — with a term life insurance policy, whole life or even universal life option.

Variable universal life offers:

  • Adjustable premium payments.

  • Flexible death benefit.

  • No guaranteed death benefit, unless you pay a fee.

As you can see, the benefit of VUL is also its drawback. You’ll be in charge of your own performance with few guarantees. If you make poor choices, you can easily end up with higher premiums than you’d planned or lose coverage entirely.

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Variable life insurance at a glance

Variable life insurance allows you to set a minimum death benefit, with the potential to pay out more depending on how your investments do. It’s older and less popular than variable universal life, but you can still find policies.

Variable life insurance offers:

  • Fixed premium payments over the life of the policy.

  • More death benefit guarantees.

Variable life insurance appeals to investors who are concerned about getting more out of their life insurance than just a death benefit, but who like the regularity of premium payments offered in whole life insurance policies.

Benefits of variable universal life and variable life insurance

Variable life and VUL both give you more control over your investments and a higher potential return than other life insurance options. For people who see life insurance as both a form of protection and an investment, variable options can solve two problems at once.

Variable universal life provides the most life insurance control and flexibility. Premiums can move up and down, death benefits can be increased or decreased and you can choose to put your cash into a wide range of investment options or fixed-rate subaccounts.

Drawbacks of variable universal life and variable life insurance

Variable life and VUL both combine an investment and an insurance policy. The federal government requires people who sell variable policies to be registered to sell securities — such as stocks — as well as life insurance. That should tell you that variable insurance products are more complex than their vanilla counterparts.

It also highlights the market risks that come with these policies. If the market performs poorly, you could be left without any value in your cash account. Many people prefer less hands-on options with more guarantees.

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