What is Variable Life Insurance?

Variable life insurance straddles permanent life insurance and investments. Unlike whole and universal policies with guaranteed cash values, variable life premiums fund market-based subaccounts with fluctuating returns. This leads to changing death benefits and cash surrender values that shift with market volatility. While more complex, their inherent flexibility allows for modifying death benefits and premiums based on evolving needs and risk tolerance. For financially savvy consumers, variable life’s market-driven cash value potential offers an appealing, tax-advantaged long-term vehicle suited for market upswings. Yet the two-edged variability also bears monitoring, particularly in enduring down markets.

How Variable Life Insurance Policies Work

 Basic Mechanics

Variable life insurance provides lifetime death benefit coverage like traditional permanent life insurance. However, rather than just building cash value in fixed accounts, most premiums fund professionally managed subaccounts that invest across stocks, bonds, and hybrid funds. As market-linked separate accounts, returns fluctuate over time, leading to variable cash value compared to fixed products, guaranteeing principal and minimum interest rates. With investment performance driving account values up or down, the resulting death benefit can also vary, unlike guaranteed universal life products.

Flexibility Over Coverage and Payments

Variable life insurance allows reasonable flexibility around tailoring and evolving coverage and premium payments within specified parameters. For example, within certain ratios, the policy owner might opt to decrease or increase the death benefit when life circumstances or estate planning needs change. There are typically guaranteed maximum face amounts. Payments also adapt based on market factors impacting cash values and the minimum funding thresholds to sustain the current death benefit trajectory. Consumers also tend to have options around withdrawals, loans, or adding extra lump sums.

Tax-Advantaged Growth Potential

Variable cash accumulation operates on a tax-deferred basis since earnings in separate accounts grow shielded from annual taxation. This deferral benefit amplifies long-term accumulation. Life insurance also pays income tax-free death benefits to any designated policy beneficiaries upon the insured’s death. This dual tax advantage is significant on variable market-linked cash that can outpace fixed life insurance when seen through the lens of supplemental retirement savings and estate planning vehicles.

The Variable Life Insurance: Pros and Cons


Potential for Cash Value Growth

Variable subaccounts invest in equities and bonds with upside potential surpassing fixed life insurance returns. Though exposing cash to market volatility, historically variables have averaged returns in the 8% range compared to fixed accounts paying 3-4% guaranteed rates. This higher return profile could allow variables to maintain purchasing power against inflation over decades, unlike fixed cash accumulating below inflation. Market-linked variables theoretically grow real cash value after inflation instead of eroding guarantees. The tradeoff is weathering market cycles with no downside principal guarantees on cash.

Flexibility over Traditional Permanent Life Insurance

Unlike locked-in traditional policies, variables permit adjusting death benefits and premiums aligned to evolving financial situations. Reduce coverage when estate needs decline or increase when new obligations arise. This adaptability separates variables from most whole life and universal life products with static parameters. There is typically more access to accumulated cash, whether to fund goals pre-retirement or offset income gaps with retirement. This tactical flexibility comes with a responsibility to manage moving parts actively.

Tax Benefits with the Variable Life Insurance

By investing through separate accounts, variables sidestep annual taxation on gains, allowing amplified tax-deferred growth and further benefiting wealth transfer plans; death benefit payouts altogether avoid income taxes. This combination of tax deferral accumulating cash while heirs receive proceeds income tax-free enhances variables’ utility for supplemental retirement and estate planning relative to taxable investment accounts.


No Guaranteed Cash Value or Death Benefit

Unlike universal life or whole-life products, variable cash values and death benefits carry exposure to market volatility and losses. Account values invested in variable subaccounts can decline during sustained downturns, reducing death benefit coverage. As found in fixed life insurance vehicles, there are no principal guarantees shielding cash from impairment in bear markets. The fluidity also means lower investment returns may fail to sustain projected death benefits, forcing increased periodic premiums to maintain coverage continuity.

Higher Costs Than Term Life Insurance

Layering investment subaccount charges atop the mortality and expense fees levied means variables carry higher costs than pure-term insurance. The asset-based fees to fund investment managers and insurance company revenue margins chip away at net returns. Term policies avoid these add-on expenses associated with variable separate accounts and their administration. Therefore, dollar-for-dollar term life provides cheaper pure mortality protection.

Complex Policies

Juggling adjustable death benefits, fluctuating cash values, and riding market cycles proves more complicated than static term or whole life insurance. This demands closer policyholder involvement in monitoring values and making allocation and benefit decisions amid volatility. There is ultimately less passivity than guaranteed life products. Comparing performance also grows more complex with variables’ shifting benchmarks.

What is Variable Life Insurance?

Investment Options for Variable Life Insurance


Variable life insurance vessels premiums after insurance costs into separate accounts, providing a menu of invested subaccounts. Policyowners select from stock funds, bond strategies, hybrids, and money market accounts spanning various risk tolerances, goals, and taxation profiles. Unlike generalized whole-life products, variables empower customized allocation. The funds mimic offerings within retail investment accounts but with tax deferral benefits amplifying returns over decades. Upside is responsible for actively managing allocations amid fluctuating markets, though.

Analyzing Investment Choices

Historical metrics like long-term returns, worst-drawdowns, and standard deviations gauge risk-adjusted performance potential across variable subaccounts. Weigh these return dynamics against expenses levied—low-cost index options often best active funds after fees. Also, assess account strategies through goal-based and age-based lenses. More aggressive early career investors might accept higher equity allocations, while those near retirement may fixate on income stability. Revisit selections periodically to ensure continued suitability over life and market cycles.

Sample investment options

Equity funds invest in companies’ stock shares, aiming for potential capital appreciation. Index funds offer a broad market portfolio at lower costs. Large/mid/small-cap funds invest in companies of different sizes, balancing risk and return. Sector-specific funds focus on industries predicted to do well but are more volatile. Overall, equity funds seek long-term growth.

Fixed-income funds mainly purchase government and corporate bonds to generate consistent income from interest payments. Government bond funds provide relatively safe interest, while corporate bond funds take on more credit risk for higher yields. Though bond funds provide stability when stocks decline, they typically offer lower returns over the long run.

Hybrid funds like target date lifecycle funds hold a mix of stocks and bonds in one portfolio to balance growth and income goals while automatically adjusting their level of risk over time. By having both asset classes, they aim to capture market gains during bull runs, while bonds provide ballast when equities decline. The mix smooths the ride for investors.

Guaranteed accounts offer a fixed return without facing stock and bond market fluctuations. However, guaranteed rates are generally lower than long-term returns available from investing in equities and bonds with their risks and potential rewards. There is a tradeoff between modest guarantees versus growth potential and income.

Key variables impacting growth

Market performance

As investments in separate accounts gain or lose money based on market returns, the account value and associated death benefit rise or fall proportionately. Strong returns can rapidly multiply cash values, while extended downturns may erode accounts. Tracking monthly statements is key.

Monthly deductions

Insurers make monthly deductions from separate accounts to cover sales loads, mortality charges, and expense fees. These regular withdrawals reduce account values, so balancing premium outlays with projected costs is essential in variable life policies. Higher deductions also diminish the death benefit pool.

Additional payments

While monthly premiums sustain variable life insurance policies, additional lump-sum payments allow faster growth. Extra infusions like a single $25,000 deposit can compound over time through continued investment gains. This builds cash value, providing more flexibility to adjust death benefits, access funds, or reduce future premiums.


Withdrawing accumulated cash from a variable life policy reduces the account value and compresses the death benefit. Though available to tap funds in a pinch, routine or substantial withdrawals undermine the long-term trajectory of the policy. Careful planning around liquidity needs prevents jeopardizing growth or coverage stability.

Scenarios demonstrating growth dynamics.

Favorable market returns

When separate accounts experience strong market returns over consecutive years, account values can snowball rapidly. With cash accumulating briskly from investment gains, variable life policyholders can strategically dial back monthly premium outlays while retaining or elevating death benefit levels. This flexibility stems from consistently bullish conditions.

Extended negative market

In lengthy bear market cycles or financial downturns, declines in separate account investments erode policy values. This loss-induced stress triggers minimum premium requirements to rise as the strained death benefit floor still must be funded. Without payment increases amid sustained investment losses, coverage risk collapses below initially guaranteed amounts.

Supplemental payments

Injecting supplemental lump sums into variable life policies turbocharges compounding. For example, contributing an extra $25,000 cash infusion into accounts averaging 6% annual returns would grow the death benefit pool by approximately $260,000 in 20 years compared to solely funding base premiums. These one-time payments pack an exponential growth punch over time.

What is Variable Life Insurance?

Final Thoughts about The Variable Life Insurance

Variable life insurance represents an intricate fusion of permanent death benefit protections alongside market-driven investment account dynamics. While offering growth potential by linking cash accumulations to separate account strategies, variability injects complexity and sequenced risks that require diligent navigation. Projected gains must balance losses, desired liquidity shouldn’t jeopardize longevity, and premium outflows need foot adverse fee withdrawals.

However, when aligned with priorities, risk tolerance, and astute stewardship, variable life insurance can elevate cash growth and flexibility beyond traditional permanent policies. The keyword is “when aligned, “—meaning robust analysis, professional guidance, and rebalancing help optimize suitability over the short and long-term arcs. With time being the friend of compounding assets but a foe of unexpected deviations, regularly revisiting how variable life insurance is tracking proves essential in fully harnessing benefits while mitigating risks associated with these sophisticated and shifting coverage products known as variable life insurance.

Disclaimers: The information in this article is for general educational purposes only and does not constitute financial advice. Please consult a qualified financial advisor to determine if variable life insurance suits your circumstances. While most variable life insurance policies offer minimum guarantees for the death benefit, these guarantees only apply if the minimum premium payments are made and may not fully cover the initial face amount in extended downturns. Withdrawals of contributions (the money you pay into the policy) are not taxed, but withdrawals exceeding contributions are typically taxed as ordinary income, not subject to additional tax penalties. Variable life insurance involves market risks and the potential for loss. Carefully consider your risk tolerance, investment goals, and long-term financial needs before making any decisions.

How is variable life different from whole life insurance?

Variable life offers more flexibility by linking the cash value to securities rather than a fixed account, enabling higher investment gains potential without guaranteeing death benefit or cash value amounts like whole life insurance.

What types of investment options does variable life offer?

Insurers typically offer a range of equity funds focusing on stocks, blended hybrid funds combining stocks and bonds, fixed-income bond funds, and guaranteed return accounts with a minimum rate. Overall, there are usually over a dozen options across risk profiles.

Do I have to pay capital gains taxes on investment earnings from variable life insurance?

No, the tax-advantaged design of variable life insurance allows all growth within the account to be income tax deferred. The death benefit paid to beneficiaries is also income tax-free. This maximizes compounding.

Can I lose money with variable life insurance?

Since investment accounts are subject to market volatility and losses and ongoing policy fees, there is a risk of diminished cash value and even having the death benefit fall below initially guaranteed amounts without monitoring.

Does variable life insurance typically cost more than term policies?

Yes, due to fees from the investment account, sales loads, mortality charges, and administration expenses, premium costs are higher for variable life versus term life insurance of equal death benefit amounts. Complexity also necessitates professional guidance.

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