What Is Variable Life Insurance & Who Should Buy It?

Name: What Is Variable Life Insurance & Who Should Buy It?
Item: What Is Variable Life Insurance & Who Should Buy It?
Author: Mandy Sleight

Variable life insurance allows you to invest some or all of the policy's cash value in stocks or bonds. This type of life insurance is best for those with high incomes, specific life insurance needs and high risk tolerance.

Updated: May 22, 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, there may be more economical choices for some. Understanding how variable life insurance works, its advantages, limitations and who it's best for can help determine if it fits your life insurance needs and goals.

How Variable Life Insurance Works
Pros and Cons of Variable Life Insurance
Variable Life Insurance Cost
Who Should Purchase Variable Life Insurance
Other Life Insurance Options
Frequently Asked Questions About Variable Life Insurance

Key Takeaways

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

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

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.

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.

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.

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.

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.

Regulation

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

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.

Risk

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

Is Variable Life Insurance Taxable?

Generally, the death benefit received by beneficiaries 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 policy, any gains above the premiums paid are taxable.

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

Investment Growth Potential

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

Tax Advantages

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

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

Market Risk

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

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.

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.

Age

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

Health Status

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

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.

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.

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.

Lifestyle Choices

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

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

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.

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.

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.

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

You are risk-averse

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

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.

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.

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.

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. Suitable for those comfortable with market risk and looking for higher growth potential.

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

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.

Frequently Asked Questions About Variable Life Insurance

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

What is variable life insurance?

Variable life insurance is permanent life insurance that offers the opportunity for tax-deferred growth through multiple investment options. You can choose a fixed death benefit option or accumulated death benefit, which also adds the cash value or paid premiums to the death benefit. However, it is one of the most expensive permanent life policies and most volatile, with market losses affecting both the cash value and death benefit, depending on your policy option.

How does variable life insurance work?

Variable life insurance works as a permanent life policy and market investment account in one. The policy has over 50 investment options to choose from and multiple death benefit options, too. However, positive and negative market fluctuations can affect the death benefit and cash value, depending on your policy choices.

How much does a variable life insurance policy cost?

The cost of a variable life insurance policy depends on your age, investment choices and policy details. The premiums are often the most expensive of all permanent life policies, and it has the most market volatility, with high fees and the potential for negative returns.

Should I purchase variable life insurance?

Only those with a high income, a deep understanding of the stock market and a healthy appetite for risk volatility should purchase variable life insurance. For most, term life insurance is sufficient, as the premium savings can be invested separately with a knowledgeable and trusted financial adviser if you don’t have market knowledge or risk tolerance.

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

Yes, you can borrow against the cash value of a variable life insurance policy. However, unpaid loans accrue interest and can reduce the death benefit and cash value.

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

The policyholder assumes the investment risk in a variable life insurance policy. Market performance directly impacts the cash value and potentially the death benefit.

Can you cancel a variable life insurance policy?

Yes, you can cancel a variable life insurance policy. Surrender charges may apply, and you could face tax implications on any gains.

About Mandy Sleight

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.