What Is Variable Life Insurance?

If you are looking for an insurance policy for life that creates cash value and lets you invest in that cash value, then you may want to consider different life insurance. Based on your objectives, Variable life insurance (and the similar variable universal life insurance) could be an excellent option for your long-term protection or investment requirements and tax planning.

Before purchasing this type of insurance, know how it functions.

What Is Variable Life Insurance?

A variable insurance plan is a form of permanent life insurance with a death benefit and cash value. You must be prepared to be active in deciding on investment options for the cash value, which is impossible with other insurance policies, like whole life insurance, in which the investment decisions are made by the insurance company you purchase it from.

Variable universal life (VUL) insurance has the features of a variable life policy combined with elements of a universal life insurance policy. You can adjust your premium payments and the death benefit amount within certain limits.

Life insurance customers looking for variable life insurance are likely to find a lot of VUL choices these days.

How Does Variable Life Insurance Work?

Like other kinds of life insurance, the flexible life insurance plan provides a tax-free death benefit to your beneficiaries when you pass away.

Variable universal and variable life life insurance policies contain an element of cash value that alters based on

  • The amount you pay for premiums.
  • Charges and expenses imposed from the insurer.
  • The performance of the investment (often like mutual funds) you’ve chosen.
  • You can take loans or withdraws from the value of cash.

Variable life insurance offers you the option of deciding which investments to make with the cash value of the money. However, you have to make decisions. Suppose you’re looking for an insurance policy on life in which you don’t need to be concerned about the details. In that case, a variable life insurance or VUL policy is probably unsuitable.

Wealth consultant and life insurance Guy Baker, founder and managing director of the Wealth Teams Alliance wealth advisory firm, explains that customers who purchase variable life insurance frequently use the policies to supplement retirement income through loans against the cash value. There is no requirement to pay taxes on the amount you’ve borrowed (unless it’s not paid back).

If you are paying premiums for a variable insurance policy, the premiums are used to:

  • The exact price of life insurance for the person who is covered.
  • Internal company fees.
  • Costs that are incurred as a result of your investment choices.
  • Your cash value.
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The Variable life insurance plan’s cash value portion may include various sub-accounts, typically bonds, mutual funds, and stocks. You may also transfer a portion of your cash value to a non-investment or fixed account that earns interest on the amount you deposit, for example, 3 percent.

It is essential to ensure that your premium payments generate sufficient cash value, or the policy will expire. For instance, if you obtain loans against your cash value, the insurer subtracts the monthly fees, your cash value may fall below the minimum amount required, and the policy could expire. In such cases, you must make an additional premium payment to ensure the policy remains in force.

Choosing a Death Benefit Option for Variable Life Insurance

Specific variable life insurance policies and VUL policies will pay your beneficiaries a set amount of death benefits following your death. For instance, if the face value of your policy is $1,000,000, that’s the amount your beneficiaries will receive regardless of the value of your cash when you die. Your death. Cash value gets transferred back to the insurance provider.

A policy with a variable death benefit will come with an amount of death benefits that increase or decrease according to the cash value.

The variable insurance plan that you are looking at could also offer additional death benefit options:

  • The face amount plus the value you earned in cash.
  • The face amount, plus the premium you paid. (In this instance, the cash value will be reverted to the insurer.)

Be sure that your financial advisor is aware of the kind of death benefit you’re looking to get, so they know the policies that apply to this option.

Variable Life Insurance vs. Variable Universal Life Insurance

At present, the phrase “variable life insurance” usually refers to the same thing that it does to “variable universal life insurance.” This is because many life insurance companies do not offer “variable life insurance” as they did earlier. They now offer VUL.

Who Is Best for Variable Universal Life Insurance?

Life insurance with variable universality may be an ideal choice for those looking for permanent coverage and wanting to be involved in their life insurance investment.

The variable universal insurance option is ideal for those who can cover losses if the investments fail to perform as they had hoped for or anticipated, for instance, those with a substantial amount of money. If you’re at ease with risk and are looking to increase your cash value, you could choose an insurance policy that is variable in nature instead of whole life insurance that has a fixed growth in cash value.

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If you’re considering the purchase of variable universal insurance, make sure you are ready to read the prospectus for the policy and comprehend it, which includes the policy’s costs, the guaranteed and projected cash value that is not guaranteed, and the death benefit. Prospectuses for policies are entirely free, as are life insurance quotes.

Tips for Buying Variable Life

Don’t pick an insurance policy based on quotes for premiums or forecasted growth of assets, suggests Barry Flagg, president and director of the life insurance data and research firm Veralytic.

“Regulations in most states for most product types permit agents, brokers or insurers to quote low premiums and/or project high account growth while charging high costs but without disclosing the higher risk of a ‘premium call,’ underperformance or even policy lapse,” Flagg states.

If you are a premium customer, you must add more money to your account for cash values to prevent the policy from expiring.

Instead of relying solely on the quoted price or projected growth in cash value, Flagg recommends choosing a policy based on internal policy costs and the results of investment funds that underlie the policy. High costs in the internal environment could lead to more expensive premiums and a lower cash value.

Other suggestions for purchasing variable universal life insurance are:

  • Get quotes from various insurance companies by contacting an independent financial advisor or life insurance representative. Quotes for universal life insurance with variable rates policies are not usually accessible online.
  • Review the illustration of the policy, Particularly the parts that are guaranteed. Do not buy a policy solely because of projections that aren’t guaranteed but appear attractive.
  • Check for insurance companies that have minimal internal policy fees.
  • Verify the financial strength of an insurance company by looking at AMBest ratings. Since you’re buying a lengthy contract, choosing a firm that will last for a long time is essential.
  • Get a knowledgeable advisor in financial planning or a life insurance specialist who can assist you in understanding the product you’re purchasing.

Benefits and Risks of Variable Universal Life Insurance


  • You can get cash loans or withdraw against the policy’s cash value.
  • The value of your cash will increase in a tax-deferred manner. There is no need to be concerned about taxes until you take money out of the value of cash. The portion of your withdrawal derived from the investment gain is tax deductible. If you get a policy loan you do not pay back or repay, you (or the beneficiaries) must pay taxes on the portion of the loan resulting from the investment gains. These are taxed as income but not capital gains.
  • If you withdraw money from the cash value, you can use it for whatever you wish, from boosting your retirement income to taking a luxurious cruise.
  • Investment options offer the possibility to increase the value of cash than other kinds of insurance for life.
  • Using a variable insurance policy to diversify your investment strategy is possible.
  • This death reward is payable to your beneficiaries tax-free.
  • Life insurance riders could be offered that add value features to your policy, for example, a chronic disease or critical illness disease rider that lets you draw money from your policy’s death benefits should you be diagnosed with the disease after purchasing the policy.
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Risks and Downsides

  • If your investments are not performing well, it is possible to lose money, even the principal.
  • The withdrawals and loans of policy — or poor investment performance could lower the value of a policy’s cash and lead to the policy being canceled. To remedy this, you could need to make sudden premium payments. Also, a cost could be associated with reinstating an expired policy.
  • Selecting an insurer with significant monthly charges can affect the growth of your cash value since more of the premium will be used to pay charges. It is recommended to look at several policies before deciding.
  • Additionally, you will be charged charges for the decisions you make regarding investments.
  • If you make a withdrawal or loan that you do not repay, you’ll be required to pay tax on the amount of funds that resulted from the investment gain.
  • There could be a limit on how many times you can move money from investment options in a year, like 25.
  • If your investments do not perform well, your death benefit could decrease. However, variable life insurance policies can guarantee the minimum death benefits.

Where To Buy Variable Universal Life Insurance

Pacific Life earned the top spot in the rankings as one of the top companies insurers of variable universal insurance, according to Forbes Advisor’s review of the top insurance companies. Below are other top insurance companies selling life insurance with variable universality:

  • Equitable
  • John Hancock
  • Lincoln Financial
  • Northwestern Mutual
  • Penn Mutual
  • Protective
  • Nationwide


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