Variable life insurance

You could build a tax-free benefit for your family, but not without some risk.

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Variable life insurance policies stand out for their investment component. As a policyholder, you can control the way your cash value is invested, but there are no guarantees on return.

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What is variable life insurance?

Variable life insurance is a permanent policy that builds cash value over time — and a portion of that cash value is invested in the market. Your provider will present you with a portfolio of stocks, bonds and mutual funds to choose from, and you can allocate your funds accordingly.

While the investment is professionally managed by the insurance company and may boost your returns, your money is subject to the ups and downs of the market. For this reason, variable life insurance is considered a security, and is the only kind of policy that’s sold with a prospectus.

Like other permanent policies, variable life insurance offers lifelong protection as long as you keep up with your premiums, plus the ability to take out a loan against your policy. The premiums are adjustable, and the policy pays out a tax-free benefit to your beneficiaries when you die.

The amount your beneficiaries receive depends on the performance of your investments. There’s no guaranteed minimum interest rate for the cash value like there is with universal life insurance.

Is this the same thing as variable universal life insurance?

As the name suggests, variable universal life insurance is a hybrid of variable and universal life insurance. With this policy, you can invest in the market and change the amount and frequency of your premium payments. The key difference is how you pay your premiums. You can choose to make a larger lump sum payment within the minimum and maximum limits, or use your accrued cash value to cover your premiums. This is why these policies are sometimes referred to as flexible premium variable life insurance.

Let’s say your premium is $400 per month. Once your cash value hits a certain number, you can opt to pay $100 out of pocket and use your cash value to pay the rest.

How does variable life insurance work?

Variable life insurance is unique when it comes to the way the cash value is invested.

Every time you pay your premium, a percentage of it will go toward the cash value of your policy. That cash value will then be invested in a number of sub-accounts. Think of these sub-accounts as mutual funds: They’re managed by the insurance provider and you wouldn’t be able to invest in them outside of the variable life insurance policy.

Since the cash value is an investment, it carries a degree of risk. It can and will fluctuate with the market. If you purchase variable life insurance, you need to be comfortable with bearing that risk, as it will affect the amount of money you can borrow against your policy and the sum that’s paid out to your beneficiaries when you die. You can surrender your policy to get the cash value, too, but weigh your profits against the surrender fees — it may not be worth it.

As your cash value continues to grow, eventually you’ll reach a point where your cash value will be able to cover the entire death benefit.

Compare life insurance providers

Name Product Issue Ages Coverage Range Medical Exam Required State Availability
18 - 85 years old
$10,000 to $10,000,000+
Depends on provider and policy
All 50 states
Compare affordable quotes from 12+ A-rated life insurance companies side-by-side.
21 - 54 years old
$50,000 to $1,000,000
Not available in Alaska or New York
Affordable 2-, 10- and 20-year term life insurance policies. Instant quotes and no medical exams.
20 to 60 years old
$100,000 to $8,000,000
Not available in New York
Term life insurance with no policy fees and the freedom to cancel anytime. Simple application process that can get you approved for coverage instantly.
18 - 64 years old
$100,000 to $3,000,000
All 50 states
Customized term life insurance policies up to $3 million, no medical exam for certain applicants.
25 - 60 years old
$100,000 to $5,000,000
Available in all states except for Montana
Offers term life insurance with accelerated underwriting. No-exam coverage up to $1,000,000 for those who qualify.

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Why choose variable life insurance?

Variable life insurance could be an attractive choice for these reasons:

  • There’s potential to significantly increase the value of your policy. With variable life insurance, your cash value is invested differently and more aggressively for higher returns.
  • You’ll achieve more growth than you would with a whole life policy. The cash value of a whole life policy is guaranteed to grow a certain amount, but doesn’t compare to the growth you could get with variable life insurance.
  • The cash value is tax-deferred. The year-on-year growth of the cash value portion of your policy isn’t taxed as ordinary income. This makes variable life insurance an ideal vehicle for those who want to build a tax-free inheritance for their beneficiaries. It’s also why these policies are sometimes called super-IRAs.
  • Policyholders can access the cash value via a tax-free loan. Once you’ve accumulated enough cash value, you can take out a loan against your policy using the cash value account as collateral. That way, you won’t be charged income tax.
  • Premium payments are flexible. Policyholders have the option to adjust their premium payments and use the cash value of their policy to cover the payments. But keep in mind that this can make a dent in the cash value.

Is variable life insurance right for me?

These drawbacks may sway your decision:

  • It’s expensive. The premiums are typically much higher than term and whole life. Plus, administrative costs, management fees and the agent’s commission eat into the premium. It may be awhile before you accumulate significant cash value.
  • There are no guarantees on return. The minimum death benefit — the policy’s face amount — is guaranteed, but the cash value isn’t. You assume all the risk. If your investments perform poorly, you may end up with a much smaller cash value than expected. On the other hand, solid investments can lead to an exponential increase in returns.
  • You’ll need to take an active role in the investment portion of the policy. The policyholder chooses and changes the investments, so you’ll want to learn about stocks, bonds and mutual funds before going ahead with the policy purchase.
  • Your premiums might rise if the investments aren’t doing well. Your life insurance provider might hike up your premium so they can funnel more money into your sub-accounts.
  • There may be caps on your growth. On the flipside, some insurers place a limit on the growth of your sub-accounts, which means that even if they’re performing well, they may never reach their full potential.
  • There’s a risk of losing coverage if you can’t make the premium payments. The payments are much higher than they are with term or whole life. If you can’t keep up, your policy may lapse and you’ll lose the cash value.

Is variable life insurance worth it?

For the average person, variable life insurance isn’t the best life insurance or investment product. While there’s potential for significant growth, the returns aren’t guaranteed.

Variable life insurance is best suited to high-income earners with a high risk tolerance to match, as well as people who want to make the most of the policy’s tax advantages.

Alternatives to variable life insurance

If you only need coverage for a set period of time, look into term life insurance. The cheapest and simplest type of coverage, these policies have steady premiums and don’t feature a savings or investment component.

If you need lifelong protection or want your policy to build cash value, these are your options, explore whole life insurance or universal life insurance.

Bottom line

Variable life insurance policies suit those who have a high risk tolerance and an idea of what’s happening with the market. Along with providing peace of mind, these policies offer flexibility and the potential for rapid growth — but there’s no guarantee.

Before signing off, compare insurance providers to make sure it’s the right fit for you and your family.

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