Variable Life Insurance

Barry Higgins co-authored Building A Better Balance Between Your Business and Your Life and has 15+ years of experience in the insurance industry.

What Is Variable Life Insurance?

Variable life insurance is a permanent life insurance policy with an investment component. The policy has a cash-value account with money that is invested, typically in mutual funds.

As a permanent life insurance policy, variable life insurance pays a death benefit to your beneficiaries when you die. The coverage then lasts until your death (in contrast to a term policy, which has a set term).

Because the cash value component of variable life insurance is invested in assets like mutual funds, it may rise or fall in value. So these policies carry more risk compared to other life insurance policies. You can often allocate a portion of your premium to a fixed account, which guarantees a rate of return, to reduce overall risk.1


  • Variable life insurance is an insurance policy in which the payout amounts are determined by the performance of the underlying securities.
  • Variable life insurance policies are considered more volatile than standard life insurance policies
  • Investors who can assume additional risk may prefer variable life policies for their tax advantages.
  • Returns on variable policies can provide tax-free income.

How Variable Life Insurance Works

A variable life insurance policy works much like any life insurance policy in that you pay a premium and then your beneficiaries receive a benefit when you die. As a permanent policy, the coverage is in effect until your death.

Variable life insurance also includes a cash value component that you can access for other purposes, such to pay for a major expense. The unique feature of variable life insurance is that its cash component can be invested in asset options, mainly mutual funds. The value of your account will depend on: the premiums you pay, how your investments perform, and the associated fees and expenses.

You can also allocate money toward a fixed account to receive a fixed rate of interest and reduce overall risk. This rate may change annually, but there is typically a guaranteed minimum, such as 3%.1

Your insurance company may require you to pay a specific amount of premiums, or it may give you the flexibility in paying premiums as long as you pay the required fees. Some providers may also offer protection against a lapse in coverage if you don’t have enough cash value to cover policy fees.

A variable life insurance policy can provide you with an opportunity to make money in the market that has tax advantages. The investment portion receives favorable tax treatment in that the growth isn’t taxable as ordinary income. So, you can draw from these accounts in later years, namely through loans using the account as collateral instead of making direct withdrawals, and receive tax-free income.

Insurance companies will provide a prospectus detailing all policy charges, fees, and sub-account expenses.2

Example of Variable Life Insurance

To illustrate how variable life insurance works, say you purchase a variable life insurance policy with an initial premium payment of $200,000. You allocate half of that toward a stock fund, and half toward a bond fund. After a year, the stock fund has increased 7% in value and the bond fund has increased 3%.

As a result, your account would have $107,000 in the bond fund and $103,000 in the stock fund for a total of $110,000. (This is a simplified example, and in reality you would also have to subtract applicable fees.)

Examples of life insurance companies that provide variable life insurance include Prudential and New York Life.

How to Buy Variable Life Insurance

Before you buy variable life insurance, you’ll want to consider a number of factors. First, review all the costs, including fees, and determine whether you can afford this type of policy.

Then, if you do want to purchase this type of policy, determine how much coverage you’ll need to meet your goals and how long you will likely need the insurance. Generally, investments with a longer time horizon can carry more risk than those with a short time horizon because they have more time to recoup any losses in the market.

Ensure that the insurance company providing the policy is a reputable one, or one that is established and financially sound.

If you buy a variable life insurance policy, then change your mind, you have a short period of time called a “look period” in which you can cancel the policy with no charge and have your premiums returned. The length of the look period will vary by insurance company, but it is typically about 10 days. After that time, you will likely lose any premiums you’ve paid and may have to pay a cancellation fee.

How is variable life insurance different than term life?

Variable life insurance is a permanent life insurance policy combined with a cash-value account invested in bonds or stocks. In contrast, term life insurance lasts for a specific number of years, a variable life insurance policy lasts until the policyholder’s death.

What are the tax benefits of variable life?

Growth of the cash value account isn’t taxable like ordinary income. The accounts can be drawn upon in later years and may be received free of income taxation. To get tax benefits, you’ll want to take out loans that use the account as collateral instead of taking direct withdrawals.

What are the risks of variable life insurance?

The major risk of variable life insurance is that your investments can lose money. Unlike with other types of insurance policies, the insurance company does not guarantee a rate of return.

The Bottom Line

A variable life insurance policy can help you meet your financial needs, investment objectives, and tax planning goals. However, these policies aren’t necessarily right for everyone. You’ll need to factor in both the potential risk and reward of investing in the market.

Consider consulting a financial advisor who can guide you through options that can best suit your own financial situation and goals.

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