Variable life insurance

Variable life insurance is a type of permanent life insurance that allows you to invest the money from your cash value; however, it comes with high investment risk.

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Nupur Gambhir

Nupur Gambhir

Senior Editor & Licensed Life Insurance Expert

Nupur Gambhir is a licensed life, health, and disability insurance expert and a former senior editor at Policygenius. Her insurance expertise has been featured in Bloomberg News, Forbes Advisor, CNET, Fortune, Slate, Real Simple, Lifehacker, The Financial Gym, and the end-of-life planning service Cake.

&Rebecca Shoenthal

Rebecca Shoenthal

Editor & Licensed Life Insurance Expert

Rebecca Shoenthal is a licensed life, disability, and health insurance expert and a former editor at Policygenius. Her insights about life insurance and finance have appeared in The Wall Street Journal, Fox Business, The Balance, HerMoney, SBLI, and John Hancock.

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Maria Filindras

Maria Filindras

Financial Advisor

Maria Filindras is a financial advisor, a licensed Life & Health insurance agent in California, and a member of the Financial Review Council at Policygenius.

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Variable life insurance is cash value life insurance that stays active your entire life, making it much costlier than a term life insurance policy. The cash value allows for the policy to be used as an investment vehicle, but this doesn’t necessarily make it a good life insurance choice for most people, since your investment options are highly limited and there is not a guaranteed return. It’s generally only recommended for people who have maxed out all other investment options.

Key takeaways

  • Variable life insurance has a guaranteed minimum death benefit that can fluctuate over time.

  • The cash value amount is not guaranteed and depends on market conditions.

  • Like any permanent life insurance policy, variable life can cost 5 to 15 times more than a term life insurance policy with the same face value.

What is variable life insurance?

As a type of permanent life insurance, variable life insurance requires you to pay your premiums for your whole life. Similar to other types of whole life insurance, variable life pays a tax-free lump sum to your beneficiaries if you die. But more often than not, it is purchased due to its cash value and utilized as an investment component.

Variable life differs from other types of life insurance, in that it provides the opportunity to invest the cash value in various funds offered by the insurance company, including mutual funds. Investment 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, as the policyholder, will bear the investment risk if the fund underperforms.

Variable life insurance vs. whole life insurance

The details

Variable life insurance

Whole life insurance

Duration

Life

Life

Guaranteed Death Benefit

Yes

Yes

Guaranteed Cash Value

No

Yes

How Cash Grows (or Shrinks)

Subaccounts — pool of investor funds offered by insurer

Earns interest at a predetermined rate

Premiums

Level

Level

Notes

Risk of holding expensive insurance policy with little to no cash value

No risk compared to other permanent types, but there are probably better investment products

Who needs a variable life insurance policy?

Due to its high cost, variable life insurance isn’t the right life insurance or investment option for most people. If you’re simply looking to ensure a death benefit payout for your family, a traditional term life insurance policy offers more coverage at a lower price. Meanwhile, most people will see higher rewards in traditional investments. But for individuals who have exhausted all other investment options, the cash value of a variable life insurance policy can prove useful.

How much does variable life insurance cost?

Variable life insurance costs are comparable to whole life insurance costs, but investment management feeds (average of 1% annually) make them some of the most insurance options. Premiums remain fixed throughout your policy, but can vary based on how long you pay them (up to age 65 or up to age 100, for example).

Because permanent life insurance policies have a cash value component and last for your entire life, they cost about 5 to 10 times more than term life insurance policies for the same face value. The high premiums for variable life insurance help cover administrative fees the insurance company needs to maintain the cash value investment account. (There are also additional investment fees.)

When you pay your premium for a variable life insurance policy, part of the payment goes toward the face value (also known as the death benefit) and part of the payment goes into the cash value (an investment account). The cash value will fluctuate based on the overall market and there’s no guaranteed minimum. The death benefit amount will also fluctuate over time, but your beneficiaries are guaranteed a minimum payout when you die.

Pros and cons of variable life insurance

There are both pros and cons to getting variable life insurance. While for most, the cons will outweigh the pros, there are certain circumstances where variable life insurance makes sense.

Pros of variable life insurance

  • It protects your family from debts like mortgage and student loans 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 establishes 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.

  • There is a risk of policy lapse if you can’t keep up with expensive premium payments, which would leave you facing surrender charges.

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How to buy variable life insurance

Because variable life insurance is more suitable as an investment rather than just life insurance, you’ll need to contact a life insurance broker that has an investment license to purchase the policy. You’ll likely need to go through the typical underwriting process and prove your evidence of insurability to get variable life insurance coverage.

Policygenius offers traditional term life insurance coverage, which is better suited to protect your family’s financial health, through some of the top life insurance companies on the market.

→ Learn more about how to buy life insurance

Alternatives to variable life insurance

  • Whole life insurance: A basic form of permanent life insurance with a guaranteed, fixed death benefit. Whole life insurance offers insurance coverage to beneficiaries that gradually reduces the insurer’s commitment as the policyholder’s cash value builds. The 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 adjustable death benefits and flexible premiums that allow buyers to use the cash value to pay for premiums. There is still a guaranteed death benefit, but the interest that the cash value earns is subject to change with universal life, whereas it’s fixed with whole life.

  • Variable universal life insurance: Variable universal life insurance (VUL) is similar to universal life insurance in that it has flexible premiums, but differs in its asset options. With a variable universal life insurance policy, you can choose the assets you invest your premiums in and there is no guaranteed minimum death benefit or guaranteed cash value. 

→ Explore the different types of life insurance here

Can you take out a loan against variable life insurance?

Yes. A variable life insurance loan is a loan that your insurance company extends to you using your cash value as collateral. Your insurance company will charge interest like any other lender, but repayment for life insurance loans is much more flexible than for traditional loans. How much you can borrow from your life insurance policy depends on your cash value amount. 

“Typically, permanent life insurance policies allow cash value withdrawal up to a certain amount depending on the size of the overall cash balance (up to about 95%),” says Anthony He, insurance agent and disability insurance operations manager at Policygenius.

How to take out a variable life insurance loan

If you have the cash value built up, taking out a loan against your variable life insurance policy can be an easy and smart financial move in certain circumstances. Before you do so, talk to a licensed insurance agent or financial advisor. A life insurance loan has unique strengths, but also unique risks. If you decide to take the loan, talk to your insurance company about the next steps.

→ Learn more about life insurance loans

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 — cheaper methods that have 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 professional or tax expert.

Frequently asked questions

What is variable life insurance and how does it work?

Variable life insurance is a type of permanent life insurance with a cash value component. Premiums paid for this type of policy are split between the death benefit and the cash value account. Variable life combines life insurance and investing, but because of the high premiums and lack of a guaranteed cash value, it's not the best option for most people.

What is the difference between variable life and variable universal life?

Both variable life and variable universal life insurance are permanent policies with cash value. Variable life insurance has fixed premiums, a guaranteed minimum death benefit, a variable face value amount, and the ability to take a loan against the policy. Variable universal life insurance has flexible premiums, no guaranteed minimum death benefit, a variable and adjustable face value amount, and allows loans and partial policy surrenders.

Who bears the investment risk in variable life insurance products?

The policyholder, rather than the insurer, bears all investment risk for a variable life or variable universal life insurance policy. The insurer bears the investment risk for whole life and universal life insurance policies.

Authors

Senior Editor & Licensed Life Insurance Expert

Nupur Gambhir

Senior Editor & Licensed Life Insurance Expert

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Nupur Gambhir is a licensed life, health, and disability insurance expert and a former senior editor at Policygenius. Her insurance expertise has been featured in Bloomberg News, Forbes Advisor, CNET, Fortune, Slate, Real Simple, Lifehacker, The Financial Gym, and the end-of-life planning service Cake.

Editor & Licensed Life Insurance Expert

Rebecca Shoenthal

Editor & Licensed Life Insurance Expert

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Rebecca Shoenthal is a licensed life, disability, and health insurance expert and a former editor at Policygenius. Her insights about life insurance and finance have appeared in The Wall Street Journal, Fox Business, The Balance, HerMoney, SBLI, and John Hancock.

Expert reviewer

Financial Advisor

Maria Filindras

Financial Advisor

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Maria Filindras is a financial advisor, a licensed Life & Health insurance agent in California, and a member of the Financial Review Council at Policygenius.

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