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Whole life vs. variable life insurance

Both of these policies build cash value, but variable life insurance comes with more risk.

If you’re looking for lifelong insurance coverage, whole life insurance or variable life insurance are two of the most popular options. Both of these permanent policies build cash value, but they grow at different rates. Whole life insurance grows at a fixed interest rate set by the insurer, while variable life insurance has a variable interest rate — which means your earnings can fluctuate with the market. Thanks to its higher risk and higher potential returns, it’s better suited to those who have a high risk tolerance to match. On the other hand, whole life insurance is the more predictable policy of the two, and offers steady returns.

What is whole life insurance?

Whole life insurance is the simplest type of permanent life insurance. It provides coverage for your entire life, as long as you pay the premiums.

There’s also a cash value component of whole life insurance that grows over time. The cash value is your money and is available for you to use however you like at any time. The cash value of a whole life insurance policy often comes with a guaranteed minimum rate of return.

How does whole life insurance work?

The life insurance part of whole life works the same as other types of life insurance: if the policy is still active when you die, your beneficiaries receive the death benefit amount. A whole life policy stays in force for your entire life unless you stop paying the premiums or pull out all its cash value.

The cash value component is a separate component that the life insurer invests for you. It grows over time and can be partially taken out after only a few years of having the policy. The cash value amount that you take out reduces the death benefit by that same amount unless you pay it back into the policy.

What is variable life insurance?

Variable life insurance is a type of permanent life insurance, similar to whole life insurance. It offers lifelong coverage as long as the premiums are paid, and it builds up a cash value component. Select your beneficiaries and the policy pays the full death benefit, as long as you haven’t pulled out any cash value from it.

Variable life insurance policies typically allow you to adjust your premium payments. Pay more than the minimum premium to grow your cash value faster. Or, choose to pay some or all of your premiums with your cash value once you have enough cash value built up.

How does variable life insurance work?

The main difference in a variable life insurance policy is the ability to choose how the cash value is invested in the market. Your life insurer has a few investment options, typically consisting of stocks, bonds and mutual funds. You decide where your cash value is invested, but your life insurer manages them on your behalf.

However, variable life insurance policies don’t come with a guaranteed minimum rate of return. So your cash value growth is subject to the ups and downs of the market.

Variable life insurance policies may come with an option to increase the death benefit as well. You can typically choose a policy that has a level death benefit or a policy that allows the death benefit to be increased or decreased by the cash value growth. These policies normally don’t guarantee the death benefit, so if your cash value underperforms, your death benefit may be less than expected.

Key features of whole life insurance vs. variable life insurance

Whole life insuranceVariable life insurance
How the cash value grows Grows at a minimum rate of return set by the insurerVaries, and is subject to the fluctuations of the market
Do premiums stay the same?Yes — they won’t change for the life of the policyYou can adjust your premiums, if you like
What’s the payout?Equal to the face value of the policy — i.e. if you have a $250,000 policy, your beneficiaries will get $250,000You can opt for a payout equal to the face value, or roll the cash value into your death benefit
Who it’s best forPeople who value stability and want to have a guaranteed cash value buildup.High earners who have diverse investment and retirement portfolios who are comfortable with the higher risk.

How do I compare whole life insurance vs. variable life insurance?

For most people, the stability of a whole life insurance policy will likely outweigh any potential benefit of a variable life insurance policy. The higher potential benefit of a variable life policy likely won’t be enough to offset its risks.

The potential drawbacks of a variable life insurance policy include:

  • Limited investment options. You won’t have complete freedom in choosing how to invest your cash value. The insurance company will give you a list of options, with the risk that you won’t fancy any of them.
  • Higher maintenance. You’ll likely need to regularly monitor your policy, to keep tabs on its cash value growth and investment growth. If you’re paying premiums with the cash value, make sure you have enough cash value left in the policy to keep it active.
  • Limited rewards. While a variable life insurance policy may bring higher returns than a whole life policy, it’s limited in what it can do. The extra returns may not be worth the extra risk and hassle. And if you wanted to invest money aggressively, there are likely better options on the open market.

If you want to invest your money, you may be better off going with the stability and level premiums of a whole life policy and then investing your money in the market however you wish.

A variable life insurance policy may only make sense for wealthier people who have alternative investments and life insurance, who simply want an extra policy and want to see how much it can grow.

How to choose between whole life insurance and variable life insurance? // WHICH WINS

Life insurance termConsider this if…
Whole life insuranceYou want permanent coverage with a stable product that grows cash value at a slow but steady pace.
Variable life insuranceYou have alternative life insurance and investments and can tolerate a high risk/high reward option.

Find the right life insurance policy and insurer for you

Name Product Issue age Minimum Coverage Maximum Coverage Term Lengths Medical Exam Required
Sproutt
18 - 60 years old
$50,000
$4,000,000
5, 10, 15, 20, 25 and 30 years
No
Compare 40+ insurers and apply online to get the lowest possible price — no medical exam required.
Policygenius
18 - 85 years old
$50,000
$10,000,000
10, 15, 20, 25, 30 years
Depends on provider and policy
Compare 12+ top insurers side-by-side to get the best possible deal, and shop return of premium policies online.
JRC Life Insurance
18 - 85 years old
$5,000
$50,000,000
10, 15, 20, 25, 30, 35, 40 years to lifetime/age 121
May be required
Compare policies up to $10 million from 45+ top insurance companies with the click of a button.
Fabric
21 - 60 years old
$100,000
$5,000,000
10, 15, or 20 years
Depends on policy
No-exam term policies up to $1 million online, with the option to upgrade to permanent life insurance later.
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Compare up to 4 providers

Bottom line

Both whole life insurance and variable life insurance are permanent life insurance products that offer lifelong coverage and grow cash value that can be used later in life. But variable life insurance comes with more risk as it rides on the swings of the market, with no guarantees and investment options provided by the life insurance company. Whole life insurance may provide slower cash value growth, but it’s often guaranteed by the insurer and doesn’t require any extra monitoring.

If you want to see how the policies stack up against each other, compare life insurance companies.

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