What Is Variable Life Insurance?

Permanent life insurance policies allow you to grow your wealth while providing long-term financial security for your family. Variable life insurance is a type of cash value policy where your returns are based on the performance of investments you select.

While this feature gives you the potential for greater returns, it can also expose you to more risk than life insurance options that offer a guaranteed interest rate. By understanding how variable insurance works, you can decide whether this policy aligns with your financial goals.

What Is Variable Life Insurance?

Variable life is a form of permanent coverage. As long as you pay the required premiums, your coverage remains active. One of the advantages of these contracts is that your premiums are typically level—even if you experience a health issue later in life, the amount you pay doesn’t increase accordingly.

As with other life insurance policies, variable life products offer a death benefit that goes to your beneficiaries when you pass away. In addition, part of each premium you pay helps build cash value you can eventually access for your own financial needs.

However, unlike cash value insurance that offers a fixed rate of return, the amount the insurer credits your policy is based on the performance of investment subaccounts, including mutual funds, stocks, and bonds. This means your cash value can increase in some years and decrease in others. 

How Variable Life Insurance Works

As the owner of a variable life policy, you select the investment subaccounts where you’d like to allocate your policy’s cash value. These may range from stock-based accounts with greater growth potential and risk to accounts with a fixed rate of return, depending on your financial goals and time horizon.

These investment-based products allow you to experience greater returns when your subaccounts perform well. However, they also expose you to greater risk than whole life insurance, which provides a minimum guaranteed rate of return.

If the investments tied to your contract decrease in price over a specific time, your cash value may experience a corresponding loss in value. Depending on your remaining cash balance, you may need to pay an extra amount—known as a “premium call”—to keep the policy in force.

Variable Life Pros and Cons

Before purchasing a variable life policy, understand its potential advantages and disadvantages.

Pros

• Your coverage remains active for life, as long as you pay the premiums.
• You can receive greater returns over the long term than more conservative whole life policies.
• You have more control over your policy since you can choose where to allocate your cash value.
• Your premiums don’t increase if you experience a health condition after purchasing coverage.

Cons

• You’re exposed to greater risk because your cash value could decrease if your investments underperform.
• If your cash value decreases, you may have to pay an extra premium or risk your policy lapsing.
• You may have to take a more active role in managing your policy.
• You may have to pay management and administrative fees, which can make variable life more expensive than other permanent life insurance products.

Who Should Consider a Variable Life Policy?

When choosing a life insurance policy, assess your financial goals and coverage needs. Variable life insurance may be right for you if:

• You want the potential to build your cash value at a faster rate than whole life insurance.
• You’re comfortable accepting the higher level of risk that comes with choosing investment subaccounts.
• You feel confident buying and managing a more complex life insurance product.
• You can afford to pay the premiums while meeting your other financial goals.

Understanding Your Life Insurance Options

If you’re in the market for life insurance, you have many options—in addition to variable life insurance—that can provide financial security for your loved ones. Understanding the key differences between policies can help you make the right choice for you and your family.

Term Life Insurance

Term life insurance provides coverage for a specific period or “term,” which can range from 10 years to 30 years. If you die within this period, your beneficiaries receive a death benefit. Term life insurance is generally less expensive than permanent life insurance but doesn’t build cash value.

Whole Life Insurance

Whole life insurance is permanent coverage that offers fixed premiums, a guaranteed death benefit, and a cash value component that grows at a guaranteed rate. These policies are ideally suited if you value stability and predictability.

Universal Life Insurance

Like whole life, universal life insurance provides permanent coverage. However, you can adjust your premiums and death benefit over time. Typically, these policies accrue cash value based on prevailing market rates, which can fluctuate over time.

Indexed Universal Life Insurance

Another form of permanent life insurance, indexed universal life (IUL) policies tie your cash value growth to a stock market index, such as the S&P 500. Most IUL products offer protection against market downturns but also cap your earnings when the index performs well. These policies can be seen as a middle ground between the security of whole life and the high risk-reward characteristic of variable life.

Securing Coverage to Protect Your Loved Ones

Variable life insurance can offer advantages over other policy types, but it might not work well for everyone’s situation. So, carefully consider your needs and goals before purchasing coverage. For personalized help and guidance, reach out to a trusted financial professional.

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