Is variable life insurance worth it?

Is variable life insurance the best life insurance product for you? We compare to term life insurance, whole life insurance, and more.

Colin Lalley 1600

Colin Lalley

Published May 10, 2018

One of the main draws of variable life insurance (and other types of permanent life insurance) is the cash value component that can potentially grow over the life of the policy. However, the rate of return on these policies is typically low. But the cash value growth of variable life insurance is more similar to mutual funds than savings accounts; there's the opportunity for a higher return, but also a higher risk that doesn't make it worth it for many shoppers.

What is variable life insurance?

Variable life insurance is a type of permanent life insurance. It lasts as long as you pay the premiums, and it has a cash value investment component, similar to what whole life insurance offers. The main difference is that a variable policy's cash value is invested in a number of mutual fund-like sub-accounts rather than a savings account.

These sub-accounts can only be invested through the life insurance policy. That means that, unlike whole life insurance (which is just a savings account), there is no guaranteed growth rate, and your cash value can actually decrease, but it can potentially grow at a much higher rate than whole life insurance.

How does the life insurance part work?

Like all life insurance policies, variable life insurance policies have three important parts:

The death benefit is a tax-free chunk of cash paid out by the life insurance company in the event that you die. In permanent life insurance policies, the death benefit is made up of two components: a regular term life insurance policy and the cash value. We’ll discuss this in further detail in the next section.

A beneficiary is a person or organization that is set to receive the death benefit. Besides the obvious choices (your spouse, your children), almost anyone, any organization, or any kind of legal relationship (such as a trust) can be a beneficiary. There can be more than one beneficiary.

Your premiums are how you pay for your life insurance policy. You can usually pay either monthly or annually.

Variable life insurance lasts for your entire lifetime, assuming you continue to pay the premiums.

How does the cash value part work?

Every time you pay your premium, a certain percentage of it will go into the cash value of your policy. This cash value will then be invested into a number of sub-accounts that you choose. The easiest way to think about these sub-accounts is to imagine them as mutual funds. These sub-accounts are only available through the policy; you could not invest in them outside of the variable life insurance policy.

Like all investments, the cash value will fluctuate depending on how well each investment is doing. The stock market is in free fall? Your cash value probably is, too. Typically, however, your cash value will grow incrementally over the course of decades. Your investments are tax-deferred as well, which is why some refer to variable life insurance as a "super-IRA."

Remember when we talked about how cash value is one component of your death benefit? In all permanent life insurance policies, your death benefit is made up of a regular term life insurance policy and your cash value. Over time, as your cash value grows, your term life insurance policy will get smaller. Eventually, your cash value will cover the entirety of your death benefit, and your variable life insurance policy will no longer have a term component.

This can be confusing to people who think that, by buying a variable life insurance policy, they will receive both the accrued cash value and the term component’s death benefit when they die. Instead, the cash value slowly replaces the term policy until it represents the entirety of your death benefit.

There are various strategies you can use to withdraw the cash value from your variable life insurance policy before you die, though they are typically less flexible than whole life insurance policies. You can also surrender your policy to get the cash value. You can surrender at any time, however, most of the growth won’t happen for two or three decades. If you surrender your policy within the first twenty years, you’ll end up paying more in surrender fees than you will have made in profit.

What's good about variable life insurance?

  • Variable life insurance lasts for your entire lifetime. As long as you keep paying the premiums, your variable life insurance policy will stay in force and provide a death benefit to your survivors.

  • Growth is tax-deferred. Sometimes referred to as "super-IRA," variable life insurance policies grow tax-deferred, which means your annual growth doesn’t need to be reported to the IRS. If your cash value is distributed as a death benefit (as opposed to being withdrawn before your death), your beneficiaries will not have to pay taxes on it.

  • It typically has a higher rate of growth than whole life insurance. While a whole life policy’s cash value is typically guaranteed to grow a certain amount, it’s smaller than the potential growth of a variable life insurance policy.

What's bad about variable life insurance?

  • It is significantly more expensive than term life insurance. When you pay your premiums for a variable life insurance policy, not only are you paying for life insurance, but you’re paying to put money into the cash value as well.

  • Your premiums can rise if your cash value performs badly. If your investments aren’t doing well, your life insurance company may raise the premium in order to inject new capital into your sub-accounts. This became a huge issue for variable life insurance policyholders after the 2008 market crash.

  • High management fees. Each one of your sub-accounts has its own management fees, similar to the way a mutual fund has fees. However, fees on your sub-accounts are typically higher than the ones you’d find on a mutual fund.

  • Caps on growth. Some life insurance companies place caps on the growth of your sub-accounts. So even if your sub-accounts are doing really well, they may not be allowed to reach their full potential.


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What alternatives are there to variable life insurance?

  • Term life insurance. Term life insurance is a cheaper and simpler alternative to permanent life insurance policies like variable life insurance. Unlike permanent life insurance policies, term life ends after a specified number of years and does not feature any sort of savings or investment component. You can usually buy more coverage (a.k.a. a larger death benefit) for a smaller premium with term.

  • Other permanent (cash value) life insurance. Besides variable life insurance, there are three other types of permanent life insurance policies: whole life insurance, universal life insurance, and variable universal life insurance. How are they different? The key is the cash value – each one takes a different approach to growing it. Other details are largely the same.

Who sells variable life insurance?

You can get a variable life insurance quote from the insurance companies who offer permanent life insurance policies like variable life insurance, but we suggest speaking to an independent agent or broker instead. They can help you compare life insurance products from a variety of companies and help you decide which type of insurance or which policy you should purchase. In order to sell variable life insurance, a life insurance agent also needs to be licensed to sell securities.

Is variable life insurance worth it?

For the majority of people, variable life insurance is neither a good life insurance product nor a good investment vehicle.

There are much better ways to invest than in a variable life insurance policy – ways that are cheaper, have a higher growth potential, and aren’t wrapped up in a complicated life insurance policy.

There is a small minority that may find variable life insurance useful due to its tax-deferred nature, but even in those cases, there are alternatives that may provide a better solution.

For the majority who won’t find variable life insurance useful, a much simpler and cheaper term life insurance policy is the way to go. In general, people should avoid combining insurance with an investment or savings component. If you’re trying to put together a long-term financial strategy that includes a variety of investments, you should speak to a financial advisor or tax expert.