What is variable life insurance?
Updated 12:50 a.m. UTC March 12, 2024
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Key points
- Variable life insurance has level premiums, a cash value component and a death benefit.
- You decide how funds are invested in the market, which means you can have gains or losses.
- Variable life insurance policies may include fees that could negate the potential cash value benefits.
- Variable life insurance is best for individuals who want to take an active role in investment decisions.
Variable life insurance provides long-term coverage with the opportunity to play an active role in your policy’s cash value growth. But there are risks and trade-offs associated with a variable life insurance policy.
Understanding how variable life insurance it works and the benefits and drawbacks of this type of coverage can help you decide if it’s right for you.
What is variable life insurance?
Variable life insurance is a permanent life insurance policy that has level premiums and a death benefit that will go to your beneficiaries when you die. The policy will remain in force as long as you pay your premiums, and it also includes a death benefit that you can tap into while you’re alive.
That may sound similar to other types of permanent coverage, like whole life insurance, but there are important differences that characterize variable life insurance, namely how cash value grows and how it relates to the death benefit.
Cash value for variable life insurance
The cash value of variable life insurance is based on decisions you make about how your funds are invested. You can choose to direct money into specific investment sub-accounts, allowing you to play a more active role in how your money grows. That’s different from other types of life insurance, like whole life, which offer a more passive cash value experience with growth based on a fixed rate of return.
The upside is that wise investment decisions can increase the rate at which your cash value grows. Conversely, a poor investment decision or a challenging market can lead to decreases in cash value.
“In a variable product, the policyholder is getting to choose how they invest it, so the policy can perform a lot better than a non-variable policy, but it can also perform a lot worse,” says Jay C. Judas, chief executive officer of the Life Insurance Strategies Group.
Because of those fluctuations, the death benefit for your beneficiaries could take a hit. To counter some of the risk associated with variable life insurance, some insurance companies offer a guaranteed death benefit rider, which means even if your cash value performs poorly, your beneficiaries will still get the full death benefit.
How much does variable life insurance cost?
The cost of variable life insurance depends on many factors, like how much coverage you want, what riders you purchase, and your age, gender and health.
Variable life policies will also come with fees, which will affect cash value growth.
If you are considering a variable life policy, it’s important to ask for the prospectus. That’s a document filed with the Securities Exchange Commission detailing the risks of the policy. A prospectus contains vital information, like fees, expenses and investment options. It can help you compare life insurance policies as you shop around.
| POLICY TYPE | PREMIUMS | CASH VALUE | TERM |
|---|---|---|---|
Term life insurance
| Fixed
| No
| Limited (usually 10 to 30 years)
|
Whole life insurance
| Fixed
| Yes, guaranteed
| Lifetime
|
Universal life insurance
| Flexible
| Yes, guaranteed
| Lifetime
|
Variable universal life insurance
| Flexible
| Yes, not guaranteed
| Lifetime
|
Variable life insurance
| Fixed
| Yes, not guaranteed
| Lifetime
|
Risks of variable life insurance
Variable life policies are not without risk. Because you can choose your investments, you can potentially earn more than you would with another type of cash value life insurance, such as a whole life policy. On the other hand, if the market performs poorly, you could lose money.
“A lot of the risk in how the policy performs is shifted to the policyholder as opposed to the insurance company. So you definitely … have to be comfortable making those investment decisions,” says Judas.
Another key consideration is policy fees. To cover the fees and expenses charged by the insurance company, you need to pay a certain amount of premiums or maintain a sufficient cash value.
Variable policies may not make sense for a lot of people, especially since other options come with less risk. However, if you prefer a hands-on approach to your life insurance investment and are okay with taking on more risk for a potentially higher reward, it may be a useful option.
Blueprint is an independent publisher and comparison service, not an investment advisor. The information provided is for educational purposes only and we encourage you to seek personalized advice from qualified professionals regarding specific financial decisions. Past performance is not indicative of future results.
Blueprint has an advertiser disclosure policy. The opinions, analyses, reviews or recommendations expressed in this article are those of the Blueprint editorial staff alone. Blueprint adheres to strict editorial integrity standards. The information is accurate as of the publish date, but always check the provider’s website for the most current information.
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