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Variable Life Insurance: What is it?

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It’s important to know all of your options for a life insurance policy before choosing one. Variable life insurance, one of those options, is also known as variable appreciable life insurance. In this article, we will explore what it is and how it works, who needs it, what the pros and cons are, if it’s worth it and your alternatives to variable life insurance. 

What is variable life insurance?

Variable life insurance is a permanent life insurance policy that includes an investment. This type of life insurance policy is one that will stay with you for life, so long as you pay the premiums. 

The investment portion of the policy includes many sub-accounts, which may include stocks, bonds, money markets and equity funds. These are all separate accounts that make up the variable life insurance policy. Exactly how many sub-accounts there are depends on which company you choose for your variable life insurance, but it could include up to 50 different investment accounts. The variable nature of this policy means the cash value can increase or decline depending on what’s happening with the market. 

How does variable life insurance work?

There are three elements to variable life insurance, including a death benefit, cash value and premium. The premium is what you pay each month, some of which goes toward the cost of the insurance. The rest of the premium goes toward the investment accounts (sub-accounts). 

Investment sub-accounts

You have a few options if the investments do well. You can put the money toward the death benefit to increase the payout, you can withdraw the money as cash, or you can use it as collateral for a loan. Also, if you were to close your account, you would receive this money as a cash payout. 

The cash value portion of the variable life insurance policy is what makes it unique from other life insurance policies. It is similar to whole life insurance in that it will pay a tax-free sum upon your death, but the variable investment portion is unique to this type of life insurance policy. 


Payments for variable life insurance are typically monthly or yearly premiums that you need to pay on time in order to keep your policy active. 

Death Benefit

Your variable life insurance policy will pay out a lump sum called upon your death. This money goes to your beneficiary or beneficiaries. 

Whole life vs variable life

Variable life insurance is similar to whole life because you will earn interest with both types of policies. However, the interest earned with a whole life account is fixed, whereas variable account earnings fluctuate depending on the markets you’ve chosen. Both are with you for life, and both have a guaranteed death benefit. A whole life policy has a guaranteed cash value, whereas a variable policy has no guarantee. 

Say you buy a variable life insurance policy with an initial premium of $50,000. You decide to allocate half of that payment to a stock fund and the other half to a bond fund. So, $25,000 goes into each of the stocks you choose. Over the next 12 months, the bond has a 3% return and the stock has a 5% return, which brings your total variable life insurance policy up to $52,000, not including any fees. Over the next 12 months, the returns may vary from these numbers, but with a whole life insurance policy, your returns are fixed for the duration of the policy. 

Who needs variable life insurance?

You may benefit from variable life insurance if you are comfortable with the various possible outcomes of the investment side. Variable life insurance is the best life insurance option for long-term investment, although you could potentially see higher returns by working with an investor directly instead of through your life insurance policy. You should have a good income to pay the premiums and fees for this type of life insurance, and you must understand that there are risks involved if the market doesn’t produce a favorable return on your investment. 

Variable life insurance pros and cons

The advantages of a variable life insurance policy include the tax-free inheritance payout that will cover your final expenses, such as funeral and burial or cremation. It can also cover any large debts such as your mortgage and any loans, depending on the payout amount. Further, it gives you the ability to invest and possibly earn a return (increasing the death benefit). You can also use the cash value you earn from funds for loan collateral or simply withdraw the cash after a certain point. 

On the other hand, the premiums will be more expensive than other life insurance policies, especially term life insurance. Another drawback is that you will be somewhat limited in investment options because you’ll only be able to invest in the funds the company makes available for you. Plus, there’s risk to consider. If you can no longer pay the premiums, you will lose your initial investment. If the sub-accounts you invest in go down, you could also lose money. 

Tax-free inheritanceMore expensive than term life insurance
Covers final expensesLimited investment options
Gives you long-term savingsRisk of financial loss
Ability to invest in various funds
Protects family from large debts
Loan collateral or cash withdrawals

Is a variable life insurance policy worth it?

For most people, it is not a good option simply because it is expensive and considered higher risk. However, if you have the income to pay the premiums for the remainder of your life, a variable life insurance policy can be worth it, especially if you want the protection of life insurance in addition to investments that could see significant returns. 

For most, a term life insurance policy is better because it will come with more affordable premiums. You could use the rest of your money to invest in a retirement fund. For most people, this is the simpler way to protect your family and invest for your retirement. 

Alternatives to variable life insurance

There are alternative permanent life insurance options to consider as well. Some other types of permanent life insurances include:

Universal life insurance

Universal life insurance builds over time with an interest rate. The money earned can be used to pay the premiums. However, your premiums could go up or down depending on the market rates. 

Whole life insurance

Whole life insurance builds over time with a fixed interest rate. 

Variable universal life insurance

This is a combination of universal life and variable life. You can choose your investments and the premiums can fluctuate. 

Guaranteed life insurance

You may need a guaranteed life insurance policy if your age or health disqualifies you for other insurance policies. 

Final expense insurance

This is also an option if you don’t qualify for other insurance policies because of your age or health. It usually covers just your final expenses, including funeral and burial or cremation, as well as any smaller debts. 

The takeaway

  • Variable life insurance policies are great if you have an excellent income and don’t prefer to manage investments separately from life insurance. 
  • These policies are more complicated than others, so make sure you understand the details and risks.
  • There are more affordable insurance options such as term life that are more budget-friendly, even if more limited.

If you have the income to support and proper understanding to leverage variable life insurance, you can potentially leave behind a nice lump sum for your family. That can pay for your final expenses and any outstanding loan balances you might have (mortgage is usually the big one). 

Plus, you can withdraw cash earned from the investments or use it as collateral for a loan. However, it is a complicated life insurance option, so consider all of your options before making your decision.

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