What is Variable Life Insurance

Like all permanent life products, a variable life insurance policy has two separate and distinct parts: The death benefit value that is paid to the beneficiary  upon the death of the policyholder, and, the cash value to which returns and  interest earned are credited while the policyholder is still alive.

A variable life insurance policy can be either a variable whole life policy or a variable universal policy. A “variable” policy derives its name from the fact  that the cash value of the policy can be invested in any combination of  investment accounts that function like mutual funds at the direction of the  policyholder. Unlike a traditional whole life or universal policy, for which  the insurance company decides how the underlying investments are apportioned, the owner of a variable insurance policy is responsible for the investment  decisions and asset allocation.

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The Investments of a Variable Life Insurance Policy

A policyholder can usually choose from a number of investment options, with some companies offering over 50 different types of investments. Depending on the company offering the policy, these options can range from very low risk to very  high risk, or from very conservative to very aggressive. Options also exist for both domestic and international asset diversification. While the policyholder  is responsible for determining where the money should be invested, the  insurance company still purchases the shares and manages the paperwork.  Therefore, gains within the investment portion of the policy are subject to  management fees and expenses.


Premiums invested for policyholders are not mixed in an account that contains any of the insurance company’s assets. Returns are not guaranteed and the value of the cash portion of the policy can fluctuate given market conditions. It is  important to remember that this type of life insurance product is also a security and must be registered with the Securities and Exchange Commission (SEC). In addition, an insurance agent must be licensed to sell insurance and  securities.

Some policies also allow the purchaser to choose between a fixed or variable death benefit. With a fixed death benefit, the amount paid to the beneficiary upon the death of the policyholder remains the same, regardless of the cash value of  the policy. With a variable death benefit, the amount paid to the beneficiary is dependent upon the cash value of the policy. Before deciding on this option, investors are strongly advised to consider whether they need the variable policy to function more as an insurance product or as an investment product. The reduction in the amount of the death benefit could have dire consequences if the money is needed by the beneficiary to maintain a standard of living.

A Variable Universal Life Insurance Policy

The premium for a variable universal life policy is flexible, just like the premium paid for a traditional universal life policy. The policyholder has the  flexibility to adjust the premium and payment schedule in order to accommodate current financial needs. He or she has the option to reduce the amount of the payment if illness or the loss of a job affects the amount of cash available  for the payment. While this may reduce the amount of cash value that has built  up in the policy, it can be a way for the policyholder to ensure the policy  remains in force.


A disadvantage to variable universal life insurance is that a market downturn cannot only reduce the value of the cash portion of the policy but also the death benefit. And, much like a margin call on a stock, a policyholder can be  required to pay additional premium amounts to keep the value of the policy level.

Suitability of a Variable Life Insurance Policy

A variable life insurance policy is generally not suitable for a person who is risk-averse or whose family would not be able to get by with a reduced death benefit. In  addition, while some insurance policies can be good investments for college savings plans, a variable life insurance policy is most often not. While it does have cash value that can increase, if the investments chosen do not do well, the policyholder risks losses that he or she may not recoup in time. And, the cost of the insurance portion of the policy is more expensive than standard  whole life or universal life policies that also provide investment options.


Because the cash value of a variable life insurance policy grows tax-deferred, earnings can compound substantially in a shorter period of time. And, a policyholder does not normally pay income tax on money that is borrowed from the policy. Cash is typically available for withdrawal up to the amount of the premiums  that have been paid.

Because it’s a life insurance product, the cash value and the money earned on the cash  is not taxable in most circumstances. This allows a policyholder to reduce his  or her taxable income. And, because in most situations the amount paid to a beneficiary is not taxable, money can be placed in a child’s variable life policy allowing a parent to pass along significant money. Surrender charges and  expenses vary among companies, most charge surrender fees if the policy is cancelled within the first 10 years.

Variable life insurance policies are securities and are therefore not FDIC insured. The insurance company selling the policy should be a member of the Securities Investor Protection Corporation (SIPC). It is the job of the SIPC to restore assets to investors who have assets in bankrupt or otherwise financially challenged firms. Due to the significantly higher premiums than other kinds of  insurance and the potential for a decrease in the value of the policy, the lapse rate of variable life policies is much higher. Most insurance agents believe that suitability for this type of insurance/investment product lies primarily with wealthier individuals in higher tax brackets.

Variable life insurance is a complicated insurance and investment product. Investors are advised to consult with a financial advisor prior to purchasing a policy in order to make sure the policy fits into the expected goals.

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