Variable Life Insurance
What it is
Variable life insurance is a type of permanent life insurance that combines a death benefit with an investment component. Part of the premium is allocated to separate accounts invested in stocks, bonds, and mutual-fund–style portfolios. Because the cash value is invested, variable life policies are treated as securities and are subject to federal securities regulation.
How it works
- Premiums fund both the insurance cost and an investment account (the cash value).
- Policyholders choose among offered investment options; investment performance determines the cash value and can affect the death benefit.
- Cash value grows tax-deferred. Policy loans can generally be taken tax-free while the policy remains in force, but unpaid loans reduce the death benefit and may become taxable if the policy is surrendered.
- Sellers must provide a prospectus describing the investment options, fees, and risks.
Advantages
- Investment control: policyowners pick investment allocations and can pursue conservative or aggressive strategies.
- Potential for higher returns than traditional whole life, which can increase cash value and potentially the death benefit.
- Premium flexibility: within policy limits, premium payments can be adjusted and excess payments can build cash value.
- Tax-deferred accumulation and tax-advantaged access to cash value (loans).
Disadvantages
- Higher cost: premiums include insurance cost, administrative fees, and investment management expenses, making variable life more expensive than term insurance.
- Investment risk: the policyowner bears all investment risk; there are no guaranteed returns and losses can reduce cash value and death benefits.
- Complexity: requires ongoing monitoring of investments and fees.
- Potential for policy lapse: poor investment performance or underpaying premiums may require higher future payments to keep the policy in force.
- Underwriting required: approval and premium levels depend on medical and other underwriting factors.
Variable life vs. Term and Whole Life
- Term life: pure insurance for a set period, typically much cheaper, no cash value, no investment component.
- Whole life: permanent coverage with guaranteed cash value and stable premiums; insurer typically bears investment risk and guarantees.
- Variable life: permanent coverage with an investment component; cash value and death benefit fluctuate with market performance and are not guaranteed.
Who it suits
Variable life may be appropriate for individuals who want permanent coverage, are comfortable managing investment risk, seek greater growth potential for cash value, and can afford the higher and sometimes variable cost. It is generally best for financially sophisticated buyers or those working with a qualified advisor who understands both insurance and securities.
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Key considerations before buying
- Review the prospectus and fee structure carefully.
- Understand how investments are chosen, monitored, and changed.
- Consider the effect of loans and withdrawals on the death benefit and tax consequences.
- Compare costs and benefits against term and other permanent policies.
- Confirm the agent is licensed to sell securities and insurance.
Bottom line
Variable life insurance offers the potential for higher cash-value growth and an adjustable death benefit by linking policy value to investment performance. That potential comes with greater cost, complexity, and investment risk—factors to weigh carefully against simpler or more guaranteed alternatives.