Variable life insurance

Interested in investing the cash value earned from your life insurance policy’s cash value? Find out if variable life insurance is the right choice for you.

Colin Lalley 1600

Colin Lalley

Published June 16, 2020

What is variable life insurance?

Variable life insurance is a type of permanent life insurance, meaning it stays in force your whole life if you keep paying your monthly or annual premiums. Variable life insurance is similar to whole life insurance (a simpler form of permanent life insurance) in that it pays a tax-free lump sum to your beneficiaries if you die, and in that it contains a long-term savings component called the “cash value” of the policy. However, unlike whole life insurance, variable life insurance offers you investment options for the policy’s cash value.

How does a variable life insurance policy work?

  1. Variable life insurance pays a lump sum to your beneficiaries when you die, called a “death benefit.” The bigger the death benefit, the more expensive the policy premiums.
  2. Monthly or annual payments, called premiums, are required to keep the policy in force. You’ll need to pay them your entire life to keep your variable life insurance policy active.
  3. Each month, a certain portion of your premium will go into a tax-deferred savings account, called the cash value of the policy. (The exact amount that goes into savings is determined by your individual policy.) The policy's cash value grows over time.
  4. You’ll have the opportunity to invest the cash value in various funds offered by the insurer. Fund performance will reflect broader market trends. You may earn more interest than you would with a whole life insurance policy, which gives you a fixed interest rate, but you’ll be exposed to risk as with any market investment if the fund underperforms.

Variable life insurance is basically whole life insurance with added flexibility around how the policy’s cash value grows over time. Here’s a snapshot of variable vs. whole life insurance:

THE DETAILSVARIABLE LIFE INSURANCEWHOLE LIFE INSURANCE
DurationLifeLife
Guaranteed Death BenefitYesYes
Guaranteed Cash ValueNoYes
How Cash Grows (or Shrinks)Subaccounts - pool of investor funds offered by insurerEarns interest at predetermined rate
PremiumsLevelLevel
NotesRisk of holding expensive insurance policy with little to no cash valueNo risk compared to other permanent types, but there are probably better investment options
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Pros and cons of a variable life insurance policy

Pros of variable life insurance

  • It protects your family from debts like mortgage and student loans in in the event of your untimely death
  • It creates a tax-free inheritance for beneficiaries (applicable to high net-worth individuals whose inheritance will be subject to estate tax)
  • It covers final expenses like funeral and other end-of-life costs
  • It establishishes long-term savings, with the ability to invest in insurer-provided funds

Cons of variable life insurance

  • It is much more expensive than term life insurance for the same level of protection for your beneficiaries
  • It has limited investment options for the cash value you’ll build, risk exposure to the cash invested
  • There is risk of losing coverage if you can’t keep up with expensive premium payments

Not sure what kind of coverage you need? Use our simple calculator to find out in 5 minutes.

Other types of permanent life insurance

Whole life insurance

A basic form of permanent life insurance. Whole life insurance offers death benefit coverage to beneficiaries that gradually reduces the insurer’s commitment as the policyholder’s cash value builds. Cash value earns interest at a fixed rate predetermined by the insurer.

Universal life insurance

Similar to whole life insurance, except it offers the policyholder the option to use the cash value to pay for premiums. The interest that the cash value earns is also subject to change with universal life, whereas it’s fixed with whole life.

Variable universal life insurance

Variable universal life insurance is similar to universal life insurance in that it has fluctuating premiums, but differs in its asset options. With a variable universal life insurance policy, you can choose the assets your premiums invest in.

Final expense insurance

A type of permanent life insurance usually used by seniors, final expense insurance is meant to cover any end-of-life costs and outstanding debts. Policies are typically sold for smaller coverage amounts—$10,000 or $25,000 for example.

Guaranteed life insurance

Permanent life insurance for seniors who may not qualify for other kinds of life insurance. Policies are sold for smaller amounts of coverage — typically a maximum of $10,000 — and nearly all applicants are accepted. Premiums are expensive relative to the amount of coverage.

Is a variable life insurance policy 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. Many shoppers prefer to avoid permanent insurance policies altogether and instead opt to buy a term life policy and invest the rest of their savings in a retirement account such as an IRA or 401(k).

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.