What is variable life insurance?

A variable life insurance policy is permanent life insurance that lets you invest premiums in investment accounts. Because that money is invested in options like mutual funds, there is both the opportunity for growth and the risk of a loss.

Cash value accounts with permanent life insurance allow you to tap into the money while you're alive if needed. Bear in mind that this is taken either as a surrender or a loan and can affect the final death benefit if not paid back.

Variable life insurance is not for most people. It has a higher level of risk associated with it and is generally more expensive than other forms of life insurance. It’s best to get expert financial advice before you buy this type of policy.

Know more about cash value life insurance policies.

How does variable life insurance work?

Like other types of life insurance, variable life insurance involves making premium payments with the expectation of a death benefit paid to your beneficiaries.

After accounting for their fees, the insurance company will invest the funds from your premium payment on your behalf. The investments can be made in a variety of assets. But typically, the money is invested in mutual funds or into an account with a fixed interest rate.

The value of your life insurance policy will rise and fall based on the underlying investments. That means you could see a rising death benefit if the underlying assets are growing in value. But if the assets are losing value, then you’ll also lose the underlying cash value.

When the policyholder passes away, the beneficiaries will receive a death benefit. The death benefit can include any of the following combinations:

  • The face amount: You choose this amount when you enter into the policy agreement.
  • Cash value plus face amount: If your account holds a cash value, this money will go to your beneficiaries after your death.

Since the details of a variable life insurance policy can vary based on the insurance company, it’s important to dive into the fine print before signing on the dotted line. Take the time to make sure you are comfortable with the death benefit and all of the costs associated with the policy.

Keep in mind that a variable life insurance policy comes with risk based on the investment options you choose. If you invest in mutual funds or other assets, there’s a risk that your policy’s cash value could go down over time. Consider your risk tolerance surrounding investment strategies before jumping into a variable life insurance policy.

Cash value of variable life insurance

Cash value is common with most types of permanent life insurance, including whole life. One difference with variable life insurance is that your policy's cash value grows more quickly if your investments perform well. If they don't, your cash value decreases.

Not all life insurance policies allow you to withdraw from the policy's cash value. If a withdrawal is allowed:

  • The money you take out is tax-free up to the basis – the amount of the premiums you paid.
  • You pay taxes on any withdrawal amount that exceeds the premium total.

Another option is to take out a loan against the policy's cash value:

  • You pay interest on the loan, and the policy's cash value serves as collateral.
  • You must repay the money, plus interest, to keep the policy in force.
  • You don't pay a surrender fee or taxes on the loan as long as you pay back the money.

Although cash value is a strong selling point of permanent life insurance, experts say it shouldn't be considered a retirement investment. Why? Because withdrawals reduce the death benefit and hurt the future financial security of the beneficiaries you're trying to protect.

Shawn Plummer, CEO of The Annuity Expert, says, “Cash value grows as you pay your premiums. If you stop paying your premiums, the policy will lapse, and any accumulated cash value will be lost. Cash value is also affected by investment returns. If the underlying investments increase, the cash value will also increase. If the investments go down, the cash value will also go down.”

What is variable universal life?

A variable universal life (VUL) insurance policy is more flexible than a a standard variable life policy. It combines variable life with a universal life policy.

Like variable life insurance policies, VUL policies have a cash value and the option to invest in it. With that option, some of the same risks apply because the cash value could grow or shrink based on the movements of financial markets.

But unlike a variable life insurance policy, a VUL policy offers the ability to adjust your insurance premiums along the way. In addition, you may have the option to increase or decrease the death benefit tied to a VUL policy as your life circumstances change.

Variable life insurance: Pros and cons

Every financial product comes with advantages and disadvantages. Here’s what you need to know about variable life insurance.

Let’s start with the pros:

  • Potential for return on investment: If your investment grows, your beneficiaries will receive a larger payout.
  • A suite of investment options: You’ll be able to invest your plan's cash value in many different assets. Although there are risks involved, there’s also a chance of growing your policy's cash value.
  • Tax-deferred growth: When you invest through this type of life insurance policy, the funds can grow on a tax-deferred basis.

Now for the cons:

  • Costs: This type of policy is more expensive than term life insurance and some other types of whole life.
  • Risks: When you invest the cash value, the assets may lose value over time.
  • Surrender charges involved: If you have to withdraw cash or give up the policy, you could face steep surrender fees.

Variable life insurance: The Bottom Line

If you are comfortable taking on risk by making investments through your life insurance policy and can afford to do so, then a variable life insurance policy is one option to consider. But it’s may not be the best way to protect your family’s financial future. Other options, like term life insurance, are generally a more affordable way to protect your loved ones. Be sure to seek expert financial advice before buying a variable life policy.


  1. Variable Life Insurance : A complete guide

Life insurance FAQs

Is variable life insurance a good investment?

A variable life insurance policy allows you to invest in assets to protect your family’s financial future. If you are comfortable taking on this risk, the cash value of your policy can rise or fall with the markets.

The volatility tied to this type of policy makes it less than ideal for risk-averse people. Keep in mind that you don’t need the help of a variable life insurance policy to make investments for your family’s future. A term life insurance policy might be sufficient as a safety net for your family.

Who assumes the risk in a variable life policy?

As the policyholder, you assume the risk in a variable life policy. If the underlying investments increase in value, then the cash value of your policy will increase. But it’s possible for the underlying investments to lose value, which would directly impact your family’s financial plans.