Variable Life Insurance

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Life insurance is a valuable policy to have, especially as you get older. If you’re familiar with life insurance, you know that there are many different policies on the market—so many that it can be confusing to understand the differences and their nuances.

If you want life insurance coverage for your lifetime and you’re a confident investor, you might be considering a variable life insurance policy. While there are some upsides to this type of life insurance, there are many downsides. We’ll explain the pros and cons in this article.

What is variable life insurance?

Variable life insurance is a type of permanent life insurance. It offers coverage for your lifetime, starting the day your policy takes effect, and ending when you pass away. Variable life includes a death benefit for your beneficiaries and cash value that can be invested in various funds.

How does variable life insurance work?

The biggest selling point of variable life insurance is that it offers cash value. However, cash value with a variable life policy works differently than with some other kinds of life insurance. Here’s a quick rundown of how it works.

The money from your insurance premium is used in a few ways. First, the insurance company keeps a small portion of the money for account maintenance and fees and puts some money towards the death benefit. The rest of the money goes towards your policy’s cash value, which is essentially an investment account. As the policyholder, you can choose how that money is invested.

When you purchase a variable life policy, you’ll receive a prospectus with all of your investing options. The cash value can be invested in securities—also called sub-accounts—which are similar to mutual funds. You can invest in index funds, equities, bonds and money market funds. Most insurance companies also offer a fixed interest investment option.

If your cash value investment does well, you have several options. You can use the money to increase the death benefit, withdraw the money as cash, or use the funds as collateral for a loan. However, most insurance companies put a cap on the maximum rate of return, so the earnings potential isn’t endless. You’ll also have to pay management fees based on where your cash value is invested.

Here’s a real-world example. Say your variable life insurance premium is $300, and $200 of it goes into your cash value account. Based on the market’s performance, you can choose which security you want to invest that $200 into. Over 10 years, your $200 grows to become $2,000. At that time, you can either pull out the $2,000 and use it as cash, add it to your death benefit, or use it as loan collateral. Keep in mind a small percentage would be allocated toward fees.

Like with any investment, your cash value is influenced by the performance of the stock market. There are good years and bad years, so you could either earn money or lose money. That’s both a pro and a con to variable life insurance. You have full control over where you invest the money, but there’s no guaranteed rate of return. It’s possible that your cash value could decrease during a particularly bad year.

Are variable life insurance policies worth it?

This all begs the question—is a variable life insurance policy worth it? Ultimately, it depends on the person and their situation, but it’s usually not a good investment.

Variable life insurance only has a few upsides. You can financially protect your family after your death, cover the cost of funeral and end-of-life expenses and build up savings by investing your cash value. However, cheaper life insurance policies offer the same type of coverage, and there are better investment options out there.

Variable life has a number of disadvantages. For one, it’s extremely expensive. The premiums are pricier than other types of life insurance, and you also have to pay management fees for your investments. Given the limited number of investment options, and the cap on returns, it’s not worth paying the higher premium. And because the market is volatile, you could end up losing all of your cash value if the market has a bad year.

The general consensus is that variable life insurance is not a good option for a majority of people. If you want to invest money, there are much better (and safer) ways to do it. There are also better options for life insurance, including:

Consider if the advantages outweigh the disadvantages for your situation.

Frequently asked questions

Is variable life insurance expensive?

Yes, variable life insurance is more expensive than many other types of life insurance policies. When your money is invested, you’re required to pay management fees to keep you money in the market. You also have to pay a certain amount of money each month to maintain the death benefit. Based on the performance of your cash value, your premium could even increase overtime.

Is variable life insurance a good investment?

Overall, variable life insurance is not a good investment. Not only do you have to pay a huge premium up front, but there’s no guaranteed rate of return. Your cash value could dwindle during a bad market year, leaving you with little to no cash value. If you want to invest and grow your money, there are better and less risky ways to do it.

What is the greatest risk in a variable life insurance policy?

The greatest risk in a variable life insurance policy is that the policyholder assumes the full risk of their investments. The insurance company doesn’t guarantee any rate of return, and doesn’t offer protection for investment losses. It’s up to the policyholder to make smart choices about where they invest their money. A secondary risk is that the policyholder could lose their coverage if their investments are failing and they can’t keep up with their monthly payments.

Written by
Elizabeth Rivelli
Insurance Contributor
Elizabeth has two years of experience writing for insurance domains such as, The Simple Dollar, and NextAdvisor, among others. In addition to auto insurance, Elizabeth regularly writes about home insurance, renters insurance and life insurance. She also covers industry trends and general insurance education.