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Variable life insurance is a type of permanent coverage that funnels your cash value into investment subaccounts. It’s 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.
But in recent years, variable life insurance has become increasingly hard to find. If you want variable life insurance, a similar option called variable universal life insurance (VUL) is more common.
Terms to know before shopping for life insurance
| Permanent life insurance 📈 | A type of life insurance that usually lasts a lifetime and includes cash value. |
| Cash value💰 | A feature of a permanent life insurance policy with monetary value that grows over time. It allows you to make withdrawals, borrow against it and more. |
| Death benefit 💸 | The amount of money the life insurance company pays after the insured person dies. |
| Premium💲 | The cost of maintaining a life insurance policy. |
| Investment subaccounts 📉 | Features of cash value policies that let policyholders choose investments. These can be stocks, bonds or mutual funds. |
| Policy lapse 📑 | A lapse is when a policyholder stops paying the policy's premium. Prolonged lapses usually end the policy’s coverage. |
What is variable life insurance?
Variable life insurance is a permanent policy with fixed premiums and a minimum guaranteed death benefit paid out when you die. The policy has a cash value component, which you can invest in mutual-fund-like subaccounts of your choosing. If your investments do well, your death benefit could potentially pay out more than the minimum.
Who is variable life insurance for?
Having your cash value invested in stocks and other securities means more risk. But it also can mean more potential for growth compared with other permanent life insurance options.
Variable life insurance is best for risk-tolerant investors who want more out of their policies, but prefer fixed payments.
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How does the cash value work?
When you pay your premiums, part goes toward the cost of insurance and other fees to keep your policy active. The rest of the money is added to your cash value.
With any “variable” policy, you can decide how your cash value is allocated, with some limitations. Your insurer will let you know your options, and then you can choose based on your investment strategy.
Your cash value will go up when your subaccounts do well and decrease when they perform poorly. If the cash value exceeds a certain amount, the life insurance death benefit will increase. But if the cash value reaches zero, your policy may lapse — which is why this kind of coverage requires a more hands-on approach.
If you’re thinking about buying variable life insurance, make sure you understand the risks before making a purchase. When you’re shopping for any permanent policy, it’s helpful to consult a fee-only life insurance consultant. They can help you understand all the financial implications of holding a policy.
» MORE: Is whole life a good investment?
Advantages and disadvantages of variable life insurance
Pros
Guaranteed minimum death benefit.
Fixed premium payments.
Potential for more aggressive cash value growth.
Cons
Requires careful monitoring of investment performance.
Greater risk of policy lapse.
Higher cost and fees involved.
Variable life insurance vs. VUL
Variable life insurance (VL) and VUL both have cash values that vary with the performance of the investment portfolio. They also share some other features, such as:
- Control over what your cash value is invested in.
- Return rates without caps.
- A hands-on approach to managing your investments.
- 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, with its fixed premium payments. In contrast, variable universal life has the flexibility of universal life insurance.
Variable life insurance (VL)
- Fixed premium payments over the life of the policy.
- More death benefit guarantees.
Variable universal life (VUL)
- Adjustable premium payments.
- Flexible death benefit.
VUL is best suited to investors who are comfortable with risk. If you make poor choices, you can easily end up with higher premiums than you’d planned or lose coverage entirely. Most buyers will be better off with a term life insurance policy or a whole or universal life option.
Alternatives to variable life insurance
If the fixed premiums and minimum death benefit of a variable life insurance policy are appealing but you can’t find a company that sells it, you may want to consider a whole life policy instead. You’ll still get lifelong coverage with some cash value growth to use later.
If cash value growth isn’t a priority but you’d still like cost-effective lifelong coverage, you could also consider a guaranteed universal life policy. The “guarantee” in guaranteed universal life insurance refers to the death benefit, which is assured as long as you’ve kept up with your premiums.
» MORE: Types of life insurance
Frequently Asked Questions
Is variable life insurance taxable?
Like other types of life insurance, variable life insurance generally has cash value and a death benefit that grows tax-deferred. However, there are unusual situations where some proceeds of life insurance policies can become taxable. Consult with a tax expert or a financial advisor to ensure you understand the tax implications of variable life insurance policies.
Does variable life insurance have a lot of fees and other policy expenses?
Variable life insurance tends to have more fees than other types of permanent life insurance. Before you buy a variable life insurance, make sure you understand how the fees and other expenses might impact the cash value of the policy.
Can you surrender a variable life insurance policy?
You can surrender or “cash in” a variable life insurance policy at any time, but note there may be surrender charges or fees. Like other types of permanent life insurance, you’ll typically be paid the cash value of your variable life policy minus any surrender charges.
