What Is Variable Life Insurance? Pros & Cons, Benefits & Whether You Should Purchase It

Variable life insurance is “life insurance in which all or part of the cash value of the policy is located in a tax-deferred investment portfolio with risk assumed by the insured for investment losses,” according to Merriam-Webster. This type of life insurance is best for those with high incomes, specific life insurance needs and a high risk tolerance.

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Last Updated: 11/17/2022
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Variable life insurance is permanent life insurance with a variable cash value component tied to a tax-deferred investment portfolio. The portfolio can consist of mutual funds, bonds, stocks or a combination. Variable life insurance is what investors with a tolerance for significant risk use to maximize cash value growth potential. This life insurance type is not the most economical choice. We recommend buying term life insurance instead and investing separately.

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Key Takeaways

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

Although variable life insurance has many tax advantages, it also has higher fees than other permanent life policies.

Variable life insurance differs from variable universal life insurance, as the death benefit of variable life insurance can fluctuate with market conditions.

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What Is Variable Life Insurance?

Variable life insurance is a permanent life policy offering higher cash value growth potential from investments in a portfolio with up to 50 options, such as bonds, stocks and mutual funds. This capacity for higher growth potential comes with higher fees than other permanent life policy types.

Unlike variable universal life insurance, those with variable life insurance can choose one of three death benefit options. The beneficiary can receive just the face amount, the face amount plus the cash value or the face amount plus premium contributions.

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Permanent life insurance offers lifetime coverage, unlike term life, which only offers a death benefit for a certain number of years before the policy expires. Whole life insurance offers level premiums and a death benefit with cash value that grows at a guaranteed interest rate. Universal life insurance offers the same as whole life insurance but with the flexibility to change your death benefit or premium if your life needs change.

How Does Variable Life Insurance Work?

Variable life insurance works like a permanent life policy, offering lifetime coverage, but only if the market investments perform well or the premiums prevent the policy from lapsing. With so many volatile market options, the policy has variable cash value, hence the name variable life insurance. 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. This differs from other types of life insurance, which offers a fixed death benefit for a certain time period (term life insurance) or for the rest of your life (whole life insurance). Universal life insurance offers the option to increase or decrease the death benefit as long as premiums or cash value are sufficient to keep the policy in force.

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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. However, cash value growth is usually much faster with variable life insurance, depending on market conditions and portfolio choices. Term life insurance doesn’t offer cash value.

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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. Dividends can be taken as cash and used to pay premiums, pay for outstanding loans from the cash value or buy paid-up additions, which is more permanent life insurance. There are no dividend options with term life insurance.

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    Guaranteed Insurability

    Permanent life policies, including variable life insurance, give the option to 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. This is not an option with term life insurance.

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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. Permanent life policies with an investment component, like variable universal life insurance, also face these regulations. Whole life and term life insurance do not have these regulations.

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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, just like variable universal life insurance, although a variable life policy tends to be riskier. Risk tolerance and market conditions depend on investment choices with either policy. There is no risk with whole life insurance, as it has a fixed and guaranteed interest rate. There is no cash value component, so there is no risk involved in term life insurance other than potentially outliving the death benefit.

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Although variable universal life insurance offers you the ability to increase or decrease your death benefit, variable life insurance allows you to add the cash value or paid premiums to the death benefit. Variable life insurance also comes with higher fees, premiums and more potential for market volatility. If you experience market losses, it can negatively affect the death benefit, which is not the case with variable universal life insurance. However, that can cause an increase in premium payments.

How Much Does Variable Life Insurance Cost?

The variable life insurance cost depends on your age, investment options and policy selections. Although we don’t have variable life policy quotes, the permanent life insurance rates below can give you an idea of what coverage might cost compared to term life insurance coverage.

Keep in mind variable life insurance can be extremely expensive and is often the highest cost for permanent life insurance, given the market investment component and volatility. 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 your investment goals.

COST OF PERMANENT VS. TERM LIFE INSURANCE FOR A 30-YEAR-OLD MALE ($500,000 COVERAGE)

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Term Life Insurance

Annual Cost

$317
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Permanent Life Insurance

Annual Cost

$6,127
Permanent life insurance policies cost on average:$5,810 more

This is 1833% more expensive.

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Permanent life policies are more expensive than term life, as they offer lifetime coverage and cash value. Depending on your age and coverage needs, permanent life insurance can cost 20 times or more than term life insurance. Consider the average cost of life insurance by policy type, age and coverage amount to help you decide which policy type is your best choice.

Should You Purchase Variable Life Insurance?

The advantages of variable life insurance are best for those with a high income and risk tolerance, who also have a good understanding of the market. 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

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

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

You can stomach the risk

Of all permanent life policies, flexible premium variable life insurance is one of the riskiest and most volatile. If you can stomach the risk and market fluctuations, plus have the ability to monitor the investment portfolio closely, you may be the right fit for this type of permanent life policy.

4

You’re looking for additional tax-free investment opportunities

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

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Those 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, and 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.

Frequently Asked Questions About Variable Life Insurance

With so many market and face amount options, variable life insurance can be a complicated type of life insurance to understand. Here are the answers to some of the most common questions about flexible variable life insurance.

About the Author


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Mandy Sleight is a professional freelance writer and licensed insurance agent. She has her property, casualty, life, and health licenses and has been working in the industry since 2005. Mandy has worked for well-known insurance companies like State Farm and Nationwide Insurance, and most recently as the Operations Coordinator for a start-up employee benefits company.

Mandy earned her Bachelor of Science degree in Business Administration and Management from the University of Baltimore and her Master in Business Administration from Southern New Hampshire University. She uses her vast knowledge of the insurance industry and personal finance combined with her writing background to create easy-to-understand and engaging content to help readers make smarter choices with their budget and finances.