What Is Variable Life Insurance and Who Should Buy It?

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Updated: November 21, 2024

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Variable life insurance combines the security of a death benefit with the growth potential of a tax-deferred investment portfolio, making it a multifaceted financial tool. This permanent life insurance policy allows you to invest in various options such as mutual funds, bonds and stocks.

While it offers significant cash value growth potential for those with a tolerance for risk, a variable life insurance policy may not be the most economical choice for everyone. It involves investment risks and rewards, distinguishing it from more traditional policies. Understanding how variable life insurance policies work, the advantages and limitations and who this type is best for can help determine if it fits your life insurance needs and goals.

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Key Takeaways

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Variable life insurance is permanent life insurance offering up to 50 investment options to provide higher cash value growth potential.

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Various factors, including age, health status and investment choices, determine the cost of a variable life insurance policy. This type of policy is generally more expensive than other life insurance options due to its investment component and associated management fees.

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Variable life insurance offers both a death benefit and the potential for tax-deferred investment growth. However, it comes with higher fees and the risk associated with market investments.

How Variable Life Insurance Works

Variable life insurance is a permanent life policy offering higher cash value growth potential from investments in a portfolio with up to 50 options, including bonds, stocks and mutual funds. This capacity for higher growth potential comes with higher fees than other permanent life policy types. With so many volatile market options, the policy has variable cash value, hence the name variable life insurance.

These policies offer lifetime coverage only if the market investments perform well or the premiums prevent the policy from lapsing. The death benefit can vary, too, depending on the policy.

Here’s how variable life insurance compares to other types of life insurance.

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    Death Benefit

    Variable life insurance offers several death benefit options. Choose from a fixed death benefit, the face amount plus cash value or the face amount plus premiums paid.

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    Cash Value

    Variable life insurance is like other permanent life policies, which offer tax-deferred growth and the option to borrow against or withdraw money from the cash value fund. Cash value growth depends on market conditions and portfolio choices.

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    Dividends

    Only mutual insurance companies offer the opportunity for dividends, which aren’t guaranteed. All permanent life policies, including variable life insurance, can earn dividends from a mutual life insurance company. You can take the dividends as cash and use them to pay premiums, pay for outstanding loans from the cash value or buy paid-up additions.

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    Guaranteed Insurability

    Permanent life policies, including variable life insurance, can include a rider for guaranteed insurability for children. At predetermined ages or life events, the insured or the policy owner can elect to buy more life coverage without proving insurability through a medical exam or health questions.

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    Regulation

    As an investment product, variable life insurance policies are regulated securities and are subject to state insurance regulations and federal securities laws.

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    Cost

    The cost of variable life insurance can vary greatly, as can its fees and other charges. The cost is typically much higher than other permanent life policies and term life insurance.

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    Risk

    Performance can vary in a variable life insurance policy. Risk tolerance and market conditions depend on investment choices with either policy.

VARIABLE LIFE INSURANCE EXAMPLE

Let us say an individual purchases a variable life insurance policy and allocates a portion of their premiums into a diversified investment portfolio, including stocks, bonds and mutual funds. Over time, if these investments perform well, the variable life insurance's cash value increases significantly.

Financial markets are inherently volatile, leading to periods where the investment value may decline. Despite these fluctuations, the variable life policy maintains a guaranteed death benefit for the policyholder's beneficiaries.

Is Variable Life Insurance Taxable?

Generally, the death benefit beneficiaries receive from variable life insurance is tax-free. The cash value component grows on a tax-deferred basis, meaning you won't pay taxes on earnings until you make a withdrawal. If you surrender the variable life insurance policy, any gains above the premiums paid are taxable.

This tax treatment highlights one of the potential advantages of variable life insurance, allowing policyholders to potentially increase their investment value without immediate tax implications.

Types of Variable Life Insurance

Variable life insurance policies offer a blend of life insurance protection and investment opportunity, tailored to different levels of risk tolerance. Here are the primary types available:

  • No-Lapse Variable Life Insurance: This type ensures that the policy remains active as long as premiums are paid, even if the investment performance falters. It's designed to provide a safety net by guaranteeing the policy won't lapse due to poor market conditions.

  • Long-Term Variable Life Insurance: Aimed at maximizing investment growth over a more extended period, this policy type often includes initial no-lapse guarantees. Not all insurers offer this, and it typically requires adherence to premium schedules to maintain the guarantee.

  • Variable Survivorship Life Insurance: Also known as "second-to-die" life insurance, this covers two individuals under one policy and only pays out after both have passed away. It offers a cost-effective way to arrange estate planning and legacy funds, although it carries higher risks related to investment performance.

Each type of variable life insurance is designed to suit different financial planning strategies, from ensuring lifelong coverage without lapses to focusing on growing investments for future financial needs.

Pros and Cons of Variable Life Insurance

Choosing the right life insurance policy involves carefully evaluating its advantages and disadvantages. Weighing these factors will help determine if variable life insurance aligns with your financial goals, needs and risk tolerance.

Pros of Variable Life Insurance

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    Investment Growth Potential

    The policy allows for higher cash value growth through market investments, appealing to those keen on maximizing investment returns.

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    Tax Advantages

    The cash value in a variable life insurance policy grows tax-deferred, offering potential tax benefits when planned correctly.

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    Flexible Premiums and Death Benefits

    This policy allows adjustments to premiums and death benefits within certain guidelines, offering financial flexibility.

Cons of Variable Life Insurance

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    Market Risk

    The cash value is subject to market fluctuations, which can be a downside if you're risk-averse.

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    Higher Costs

    Variable life insurance often comes with heftier premiums than other life insurance types. Variable life insurance also generally incurs fees, including fund management and administrative costs.

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    Capped Returns

    While the policy offers investment opportunities, there may be a limit to how much you can earn. This cap can hinder your earning potential, especially compared to other investment avenues.

Variable Life Insurance Cost

Given the market investment component and volatility, variable life insurance can be expensive and is often the highest cost for permanent life insurance. With so many options available for variable appreciable life insurance, it’s best to get a quote directly based on your life insurance needs and investment goals.

Factors Affecting Variable Life Insurance Cost

The cost of variable life insurance depends on an individual's profile. Understanding the factors that insurance companies consider when determining premiums can help you better anticipate your variable life insurance costs and possibly even lower them.

  1. 1
    Age

    Younger individuals tend to receive more favorable rates. Insurance companies view them as lower risk, which translates to lower premiums

  2. 2
    Health Status

    Your medical history plays a significant role. Conditions like high blood pressure or diabetes can elevate your premiums due to increased risk.

  3. 3
    Investment Options

    The investment sub-accounts you opt for can influence the cost. Different investment options have varying management fees, affecting the overall policy cost.

  4. 4
    Policy Features

    Adding optional riders or specific features to your policy can also contribute to a higher premium. These add-ons provide extra coverage or flexibility but come at a cost.

  5. 5
    Occupation

    Jobs that are considered high-risk can lead to higher premiums. For example, a firefighter may have to pay more than an office worker.

  6. 6
    Lifestyle Choices

    Habits like smoking or excessive drinking can increase your premiums. Even your driving record can be a factor.

  7. 7
    Gender

    Statistically, women live longer than men, which often results in lower premiums for women.

Who Should Purchase Variable Life Insurance

The advantages of variable life insurance are best for consumers with a high income and risk tolerance, who also understand the market well. However, most people should steer away from flexible variable life insurance because of its high fees, premiums and level of risk.

When to Purchase Variable Life Insurance

  1. 1

    You have a high income

    With high fees and premiums, low-income earners are not well suited to the volatility of a variable life policy. Although the growth potential can be attractive, high-income earners can better absorb market losses that affect not only the cash value but also the death benefit.

  2. 2

    You understand the market

    If you have a deep understanding of the market, including asset allocation and risk and reward, variable life insurance may be for you. This policy type may also be worth it for those who aren’t market-savvy but have a trusted adviser who can monitor the variable life cash value and help you make informed and responsible decisions.

  3. 3

    You can stomach the risk

    Flexible premium variable life insurance is one of the riskiest and most volatile of all permanent life policies. You may be the right fit for this type of permanent life policy if you can stomach the risk and market fluctuations while closely monitoring the investment portfolio.

  4. 4

    You’re looking for additional tax-free investment opportunities

    If you’ve already maxed out other tax-advantaged investment vehicles, a variable life policy may be worth considering. The cash value grows tax-deferred, like other cash value permanent life policies.

When to Avoid Variable Life Insurance

  1. 1

    You are risk-averse

    If you're uncomfortable with market risk, these policies may not suit you.

  2. 2

    You have limited budget

    If you're looking for a more economical option, the higher fees associated with variable life insurance may not align with budget limitations.

  3. 3

    You have short-term needs

    A term life policy might be more appropriate if your insurance needs are temporary, such as covering a mortgage or providing for minors.

  4. 4

    You prefer guaranteed returns

    If you're looking for an insurance product with guaranteed cash value growth, other permanent life insurance options like whole life may be more suitable.

How to Buy a Variable Life Insurance Policy

Purchasing a variable life insurance policy involves several steps to ensure that it aligns with your financial goals and risk tolerance.

  1. 1

    Assess Your Needs

    Determine your financial goals, the needs of your dependents and how much risk you are willing to take on. Variable life insurance is suitable for those looking for a combination of life insurance protection and potential investment growth.

  2. 2

    Get Quotes

    Contact multiple insurance providers to get variable life insurance quotes. Compare these quotes not just on price but on the flexibility of the policy, investment options and the insurance company's stability.

  3. 3

    Choose Investment Options

    Variable life insurance policies offer a range of sub-account investment options. Depending on your risk tolerance and financial objectives, select the sub-accounts that best match your investment strategy.

  4. 4

    Understand the Policy Details

    Make sure to understand all variable life policy elements, including fees, potential for cash value growth and the circumstances under which the policy benefits are paid out.

  5. 5

    Apply and Undergo Underwriting

    Once you’ve chosen a policy, complete an application and go through the life insurance underwriting process, which may involve a medical exam and detailed financial disclosures.

  6. 6

    Review the Policy

    Review the variable life insurance policy details thoroughly before finalizing. Check for any life insurance riders or additional benefits and ensure all your questions are answered.

Other Life Insurance Options

Variable life insurance may not be suitable for everyone. Explore all available options and understand which type of life insurance best suits your unique needs and financial goals to make an informed decision.

  • Whole Life Insurance: Provides lifetime coverage with a fixed premium and guaranteed cash value growth. Whole life insurance is best for those seeking long-term financial stability and predictability.
  • Universal Life Insurance: Offers flexible premiums and the ability to adjust the death benefit. It also has a cash value component that earns interest. Universal life insurance is ideal for those who want a combination of flexibility and investment opportunities.
  • Term Life Insurance: Provides coverage for a specific term, usually 10, 20 or 30 years, with no cash value component. Term life insurance is best for those who need substantial coverage for a specific period, such as until children are financially independent.
  • Variable Universal Life Insurance: Combines the features of universal life insurance with investment options, allowing for a variable cash value and death benefit. It is suitable for those comfortable with market risk and looking for higher growth potential.
  • Variable Whole Life insurance: This type is ideal for individuals seeking the security of whole life insurance with the added benefit of investment growth. This policy integrates an investment component, allowing the cash value to grow based on market performance, offering stability and potential for increased returns.

Your best life insurance policy will depend on your financial profile and current and future needs.

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MONEYGEEK EXPERT TIP

Consumers who are high-income earners with specific life insurance needs and goals are best suited for variable appreciable life insurance. Most people would do well to opt for term life insurance, which offers lower premiums and a level death benefit for a specific number of years while being able to invest the rest of the premium elsewhere. We’ve analyzed the best term life insurance companies to help you choose the right fit for you.

Variable Life Insurance vs. Variable Universal Life Insurance

When it comes to choosing a life insurance policy with an investment component, two options often come to the forefront: variable life insurance and variable universal life insurance.

Main Similarities:
  • Investment Component: Both policies allow for cash value accumulation through market investments.
  • Permanent Coverage: Both are types of permanent life insurance offering lifetime coverage.
  • Tax-Deferred Growth: The cash value in both policies grows tax-deferred.
Main Differences:
  • Death Benefit Flexibility: Variable universal life insurance offers the ability to increase or decrease your death benefit. In contrast, variable life insurance allows you to add the cash value or paid premiums to the death benefit.
  • Fee Structure: Variable life insurance generally comes with higher fees and premiums than variable universal life insurance.
  • Market Volatility Impact: Market losses can negatively affect the death benefit in variable life insurance, which is not the case with variable universal life insurance. However, market losses in variable universal life can lead to increased premium payments.
  • Cash Value Growth: Variable life insurance has a greater potential for cash value growth, while variable universal life offers slower cash value growth but more flexibility in death benefits.

Both policies are best suited for high-income earners with some investment knowledge or access to a professional investment manager. They offer market-based growth potential but differ in flexibility, fees and how they handle market volatility.

Variable Whole Life Insurance vs. Variable Life Insurance

Understanding the nuances between a variable whole life insurance policy and a variable life insurance plan can help you make an informed decision based on your financial goals and risk tolerance.

Variable whole life insurance can be described as a hybrid model combining the security of whole life with the growth opportunities of variable life. Variable life insurance can be described as a policy that combines death benefit protection with investment opportunities.

Main Similarities:
  • Investment Component: Both policies include investment options for cash value growth.
  • Market Risk: Both carry the risk associated with market performance fluctuations.
  • Permanent Coverage: Both provide lifelong insurance coverage as long as premiums are paid.
Main Differences:
  • Premium Structure: Variable whole life insurance has fixed premiums; variable life insurance offers flexible premiums.
  • Policy Stability: Variable whole life insurance offers more stability with guaranteed cash value growth; variable life insurance’s cash value fluctuates more with the market.
  • Death Benefit: Variable whole life insurance generally has a more predictable death benefit; variable life insurance can have a variable death benefit based on investment performance.

Choosing between these policies depends on your need for stability versus flexibility and your comfort with market risks. A variable whole life policy provides more predictable premiums and benefits, while variable life insurance offers greater flexibility and potential for higher returns.

FAQ About Variable Life Insurance

Here are the answers to some of the most common questions about variable life insurance.

What is variable life insurance?

How does variable life insurance work?

How much does a variable life insurance policy cost?

Should I purchase variable life insurance?

What determines the cash value of a variable life policy?

Can you take out a loan against a variable life insurance policy?

Who takes on the investment risk in a variable life insurance policy?

Can you cancel a variable life insurance policy?

What insurance product has both investment and insurance components?

About Mandy Sleight

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Mandy Sleight is a licensed property, casualty, life and health insurance agent with 20 years of experience in the industry. She has worked for major insurance companies like State Farm and Nationwide, and most recently as the Operations Coordinator for a startup employee benefits company.

Sleight holds a business administration and management degree from the University of Baltimore and a master's in business administration from Southern New Hampshire University. She uses her vast knowledge of insurance and personal finance to create easy-to-understand and engaging content to help readers make smarter choices with their budgets and finances.

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