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What Is Variable Life Insurance?

Variable life insurance shares features of both a permanent life insurance policy and an investment account. A portion of your premiums is deposited in a separate investment account that grows based on market performance. This can build cash value, which will be issued to your beneficiaries plus a cash payout (also called death benefits) at any age you die, assuming you stay on top of your premiums and policy fees.

A variable life policy is one of the riskier forms of life insurance, as your cash value growth is based on market performance — if your investments underperform, you may lose money. Find out if variable life insurance is the right fit for you.

What Is Variable Life Insurance?

Variable life insurance is a type of permanent life insurance that issues a cash payout to your beneficiaries in the event of your death. Variable life policyholders have lifelong coverage, so long as premium payments are maintained.

Like most permanent life policies, variable life insurance has a cash value component that can be borrowed against as a loan or cashed out early if you cancel the policy. The policy builds cash value by investing a portion of your premiums in securities (e.g., stocks, bonds, mutual funds). Depending on how your investments perform, you may increase your cash value account's rate of return or lose money.

How Does Variable Life Insurance Work?

Variable life insurance will issue a cash payout to your beneficiaries in the event of your death at any age (typically up to 121 years), so long as you continue paying your premiums. Beyond the cash payout, your beneficiaries will also receive any cash value accumulated through your policy.

Cash value in a variable life insurance policy accumulates by investing a portion of your premiums in the securities market. Your insurer will offer a selection of investment securities to choose from, which can include stocks, bonds and mutual funds. Cash value growth will depend on how your investments perform. High-risk investments may offer a potentially high rate of return but can also result in financial loss if they underperform.

A variable life policy is one of the riskier forms of life insurance.

A variable life policy can carry various fees related to managing your policy and investments, such as investment transaction fees and underlying mutual fund fees. Some of these fees are paid for by your policy's accumulated cash value. However, if your investments underperform and there is insufficient cash value to cover the policy fees and expenses, your policy will lapse — this means your beneficiaries will not receive a cash payout after you die.

Although variable life insurance has a greater growth potential compared to other types of permanent life insurance policies, this is a considerable risk worth noting.

Cash Value Loans and Early Payouts

When enough time has passed and cash value has accumulated, the insurer may allow policyholders to borrow against the policy in the form of a loan. The loan would need to be repaid plus interest. If it is not repaid before the insured dies, then the outstanding balance would be deducted from the cash payout issued to the beneficiary.

You may have the option to cash out the accumulated equity early by canceling the policy. However, this means you would be surrendering death benefits and your beneficiaries will not receive a cash payout when you die. Be sure to confirm with your agent how building cash value works and any applicable fees when cashing out.

How Much Does Variable Life Insurance Cost?

Nationwide provided us a variable life insurance premium quote starting at $85.82 per month for $250,000 of coverage. This quote is for a relatively healthy 30-year-old male who doesn't drink or smoke. However, the actual cost of a variable life insurance policy will vary based on multiple factors, including:

  • Age

  • Coverage amount

  • Alcohol and tobacco use

  • Dangerous hobbies/recreational activities (e.g., rock climbing, scuba diving)

  • Dangerous occupations

  • Past bankruptcies

Generally, older individuals and those with pre-existing conditions will experience higher variable life insurance premiums.

What Are The Risks of a Variable Life Insurance Policy?

The cash value component of a variable life insurance policy largely depends on how well your investments perform. Similar to investing in stocks outside of a life insurance policy, there is a risk-reward relationship. Riskier investments may present opportunities for greater growth but can also go bust and result in financial loss.

Cash value in a variable life insurance policy accumulates by investing a portion of your premiums in the securities market.

Moreover, variable life insurance policies also come with fees related to managing your underlying investments. The growth in cash value can be used to cover these additional expenses. However, if you do not have sufficient cash value to cover your fees because your investments underperformed, you may have to pay for them on top of your premium payment or your policy may lapse. If this happens, your beneficiaries will not receive a death benefit when you die.

What Is the Difference Between Variable Life Insurance and Term Life?

The primary differences between variable life versus term life insurance are coverage length and whether there is a cash value component. 


Variable Life

Term Life

Coverage Period

Lifelong coverage

Typically 5-30 years

Cash Value

Builds cash value over time

No cash value component

Investment

Invest cash value in securities market

No investment option

Cost

Typically higher rates than term life

Typically lower rates than variable life

Premium

Level (stays the same)

Increases after each term renewal

Differences in Coverage

As a type of permanent life policy, variable insurance offers lifelong coverage. Whether you die at 30 years old or 90 years old, your beneficiaries are entitled to death benefits as long as you pay premiums regularly and cover your policy fees and expenses. 

Coverage length on term life policies can be as short as one year and typically extend up to 30 years. Once the term expires, you will need to renew the term policy or convert it into a permanent life policy, if your insurer offers this option.

Cash Value Component and Investment Opportunity

Variable life policies have a cash value component that can build equity over time. A portion of your life insurance premiums is deposited into a separate investment account, which you can manage. Your beneficiaries are entitled to the accumulated cash value on top of the policy's cash payout in the event of your death. Some insurers may allow for policyholders to borrow against the accumulated cash value in the form of a loan, as well.

There is no cash value component available with a term life policy.

Differences in Cost

The cost of a variable life policy is generally higher than a term life policy. First, the higher cost is partly due to the advantages you gain in building equity and the recurring cost is lifelong if you maintain your premiums. Since variable insurance also functions as an investment vehicle, policyholders are also subject to various administration and investment management fees.

Differences in Premiums

Premiums on a variable life policy are level — this means that they do not increase or decrease over the life of the policy. Generally, whatever rate you received when you first purchased the policy will be the same when the policy ends.

You can expect higher rates when you renew a term life policy (if you choose to do so). The premiums will increase because insurers will consider the higher risk associated with your increased age. The premium increase can also apply if you choose to convert your term life policy into a permanent life policy, like a variable life policy (not all insurers offer the option to convert).

Compare Variable Life Insurance Quotes

Who Should Consider Variable Life Insurance?

Variable life insurance is better suited for individuals with investment experience, since choosing the right investments will be essential to growing your policy's cash value. Ideally, variable life policyholders can assess the growth potential of different securities to maximize their rate of return. If you want to assume lower risk and have your cash value grow at a lower but guaranteed rate of return, you might want to consider a whole life policy.

Coverage length and cost are additional considerations. If you need lifelong coverage — you have a medical condition that increases your mortality rate, for instance — then a variable life insurance policy could be worth it. However, the costs are generally higher than a term life policy and you would need to assess if there is room in your budget.

What To Do Before Investing in a Variable Life Insurance Policy

Before investing in a variable life insurance policy, you should clearly understand how it works and how much it will cost. Remember: variable life insurance has an investment/cash value component and you can lose your hard-earned money if your investments do not perform well. Therefore, you should consider scheduling an appointment with an insurance agent to explain the features, costs and answer any questions you may have.

High-risk investments may offer a potentially high rate of return but can also result in financial loss if they underperform.

Do not meet with one life insurance provider, either. Shopping around and comparing variable life policy costs, coverages and the helpfulness of their representatives can help you make the right choice.

Pros and Cons of Variable Life Insurance

Pros

Cons

Lifelong coverage

Risk of financial loss

Builds cash value

Fees

Higher growth potential than whole life policy

Complex

Pros Explained

  • Lifelong coverage: Unlike term life policies with limited duration coverage, beneficiaries in a variable life insurance policy are entitled to death benefits for however long you maintain your premiums and policy fees.

  • Builds cash value: A portion of your premiums are deposited into a separate investment account which can accumulate cash value over time. Any equity built up in your cash value account is added to the death benefits issued to your beneficiaries when you die.

  • Higher growth potential than whole life policy: Variable life policies have a higher growth potential compared to whole life policies. Whole life insurance typically offers a guaranteed rate of return but it can be considered quite low (e.g., 2% annually). With variable life insurance, you can take on greater risk to potentially increase your return rate.

Cons Explained

  • Risk of financial loss: While there is a higher growth potential if your investments perform optimally, you can lose money if their performance takes a nosedive.

  • Fees: Policyholders should be mindful of variable life insurance fees, including administration and investment management fees.

  • Complex: Understanding how variable life insurance can be a steeper learning curve for those new to life insurance and investing. There are much more decisions regarding investment options and fees to juggle compared to term life and whole life policies. 

Variable life insurance policies come with fees related to managing your underlying investments.

Variable Life Insurance FAQs

What is a variable life insurance policy?

A variable life insurance policy issues a cash payout to your beneficiaries at any age you die, so long as you make premium payments. Variable life insurance also has a cash value component, which invests a portion of your premiums in stocks, bonds and other securities. Due to this, variable life policies have a higher growth potential than other forms of permanent life insurance but at additional risk — you can lose money if your investments perform poorly.

What is the difference between whole life and variable life insurance?

Both whole life and variable life insurance policies offer lifelong coverage and a cash value component but differ in how that cash value grows. Cash value in whole life policies typically earns interest at a lower but guaranteed rate, like a savings account. Variable life insurance functions more like an investment account, allowing policyholders to increase their growth potential based on how their investments perform (but also risk financial loss for poor investment performance).

Can you cash out a variable life insurance policy?

Yes, you can cash out the accumulated cash value in a variable life insurance policy but you will surrender your death benefits — your beneficiaries will not receive a cash payout after you die. A surrender charge may also apply if you cancel the policy too early, with time frames varying by the life insurance company.

What are the disadvantages of variable life insurance?

Since cash value on variable life insurance grows based on the performance of your investments, you risk losing money if they perform poorly. If your cash value is not enough to cover your policy fees, your policy can lapse and your death benefits will be surrendered. Juggling the different fees and analyzing different options can make variable life insurance difficult to understand for some individuals.

A Simpler Way To Shop for Variable Life Insurance

Variable life insurance isn't for everyone. There are many parts at play that can increase your rate of return but at higher risk, making this policy better suited for investor-minded individuals. If you think a variable life insurance policy is right for you or if you want to explore other life insurance options, SmartFinancial can help you find the right policy. To narrow down your options and get free life insurance quotes, answer a quick questionnaire about your insurance coverage needs and budge after entering your zip code below.

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