What You Should Know About Variable Life Insurance

If you’re looking for a life insurance policy that combines lifelong coverage with a versatile investment component, you may be considering a variable life insurance plan. Variable life insurance policies offer consumers more flexibility and control than other types of permanent life plans, but it can come at a cost. In this article, we’ll cover the basics of variable life insurance plans and discuss their advantages and disadvantages.

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What Is Variable Life Insurance and How Does It Work?

Variable life insurance is a type of permanent life insurance policy that combines a death benefit and a cash-value investment policy. Coverage remains in effect as long as premiums are paid, and the death benefit pays out to the plan’s designated beneficiaries after the insured dies.

The policy's premiums fund the investment component over time, and this cash value may be invested in a limited selection of bonds, equities and other instruments according to the policyholder’s preferences. The market performance of these investments determines how quickly the policy's cash value accrues, which can fluctuate over time. If the policy’s value grows, the policyholder has several options for the additional funds:

Cash withdrawal: Cash that has accrued in the investment portion of your account may be withdrawn as a lump sum or in several smaller payments. Surrender fees may be assessed when withdrawing funds within the first several years of policy ownership.
Increased death benefit: Money earned through investments may be applied to the death benefit so that your beneficiaries receive a larger payout when you die. Once these funds are added to the death benefit, they’re no longer considered part of the investment so they aren’t subject to market volatility.
Loan collateral: As the cash value in your plan accrues, it may be used as collateral for mortgages and other loans or serve as a loan itself. These loans are typically nontaxable and won’t result in surrender charges. However, they may result in a lower death benefit payout if you should die before the loan is paid off.
Premium payments: In some cases, accrued cash value may be applied toward plan premiums, reducing or eliminating the need for monthly payments.

Variable life insurance may also be known by several other names, including variable universal life insurance and variable appreciable life insurance. This type of plan doesn't always result in a cash value increase. Poor investments may result in overall losses or even a lapse of the plan.

What Is the Difference Between Whole Life Insurance and Variable Life Insurance?

Whole life insurance is the umbrella that variable policies fall under. Whole life insurance policies are plans that include both a death benefit and a savings or investment component. Traditional whole life policies are permanent plans that guarantee a death benefit payout to beneficiaries as long as the premiums are paid. They offer a guaranteed cash value accumulation over the life of the policy.

Although features vary from plan to plan, variable life policies typically differ from traditional whole life insurance policies in two notable ways:

Control: Most traditional whole life policies include a savings component. Funds marked for this portion of the plan are deposited into an investment account with a guaranteed return rate. Variable plans let policyholders choose among several investment options as the policy’s cash value accrues.

Value: A whole life policy guarantees the cash value of the plan, and growth typically has a guaranteed minimum specified in the contract. The cash value of a variable plan relies on the market and may increase or decrease accordingly.

Is Variable Life Insurance A Good Investment?

Because its death benefit component — and in some plans, its premiums — are tied directly to the investment component, variable life plans aren't a good investment for every consumer. As compared to traditional whole life insurance, variable plans may have the following advantages and disadvantages that should be weighed when considering whether this type of policy is right for you.

Advantages of Variable Life Insurance

For investors who like to manage their own money, variable life insurance has several main advantages:

Control: The main advantage of a variable life insurance policy is in the level of control it provides. The policyholder chooses how their funds are invested, and many plans offer a wide array of options, including bonds, equities and money market instruments. If their investment makes money, the policyholder may also choose how funds are applied to the account. This added value may be taken as a cash withdrawal, used as loan collateral, or applied toward the death benefit.
High earnings potential: Because of the wide array of investment options available with a variable plan, it has the potential for high earnings. Although there’s no guarantee that investments will result in high earnings, this potential can make a variable plan attractive to purchasers willing to take a risk.
Flexibility of premiums: Many variable life plans offer flexible premiums. Plans typically specify minimums and maximums for premiums, and payments may fall anywhere between those two figures, allowing for overfunding. As the plan’s cash value accrues, this money may also be applied toward the premium, reducing or even eliminating the need for payments.

Disadvantages of Variable Life Insurance

For many investors, the disadvantages of variable life insurance outweigh the advantages. The downsides of this type of plan may include the following:

Risk of loss: The investment component of a variable life plan increases or decreases depending on individual investment choices and stock market performance. Because the market can be volatile, there’s always a risk of loss involved in a variable policy.
Policy lapse: Because the policy’s cash value relies on market performance, variable plans may require additional funding to maintain a sufficient cash value to cover fees and other expenses. With insufficient cash value, your policy may lapse, leaving your beneficiaries with no death benefit payout when you die.
High fees: Variable life insurance plans often come with higher fees than other plans. One reason is because the investment component may require significant administrative involvement. Fees may also vary depending on your personal risk factors, including your age, overall health and family history.

Should You Consult a Professional Before Purchasing Variable Life Insurance?

Like most life insurance products, variable life plans can be complex. Before purchasing a plan, it may be helpful to consult a knowledgeable insurance agent or to speak with a trained company representative. These industry professionals can help you navigate the advantages and disadvantages of each type of plan so you can find a policy that suits your financial and personal needs.