Variable Life Insurance: What Is It? How Does It Work?

Shawn Plummer

CEO, The Annuity Expert

Variable life insurance is a type of permanent life insurance. It lets you invest the money in your cash value; however, it comes with risks.

Variable life insurance is a type of life insurance that stays active your entire life. It can be used as an investment, but it isn’t always good because the investment options are limited, and there’s no guarantee.

It’s usually only advised for people who have exhausted all other investment possibilities.

What is variable life insurance?

Variable life insurance is permanent life insurance. You pay your monthly or annual premiums for your whole life. Then, if you die, it pays a tax-free lump sum to your beneficiaries. But sometimes, people buy it because they want to use the money in the policy as an investment.

Variable life is different from other types of life insurance because it lets you invest money in various funds. As a result, the investment performance will reflect broader market trends.

You may earn more interest with a whole life insurance policy but also take on the risk. You have to invest your money with the policy, which is risky if they don’t do well.

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Who needs a variable life insurance policy?

Variable life insurance is too expensive for most people to buy it. Traditional term life insurance is better if you want to ensure that someone gets money when you die. But if you have no other investment options, then variable life insurance may be good for you.

How much does variable life insurance cost?

Variable life insurance costs are like whole life insurance premiums. But they can vary depending on how long you pay them.

Permanent life insurance is more expensive because it lasts for your whole life. It is about 5-10x more expensive than a term life insurance policy with the same face value. The high premiums for variable life insurance help cover administrative fees that an insurance company needs to maintain the cash value investment account.

When you pay for a variable life insurance policy, some of your money goes to the face value and some to the investment account (cash value). The investment account will fluctuate based on the market, and there is no guaranteed minimum. But when you die, your beneficiaries are guaranteed a minimum payout amount.

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Pros and cons of variable life insurance

There are both pros and cons to variable life insurance. For most people, the cons will be more than the pros. But there are some times when it makes sense for people to have this type of insurance.

Pros of variable life insurance

  • It is a way to protect your family from debts like a mortgage and student loans if you die.
  • It creates a tax-free inheritance for the people who are inheriting.
  • This pays for the final expenses of a person’s life, like funerals or other costs that come after death.
  • It establishes long-term savings.

Cons of variable life insurance

  • Term life insurance is much cheaper. It has the same amount of protection for your beneficiaries.
  • It doesn’t have many investment options. It’s not suitable for investing your cash value.
  • You might lose your insurance if you don’t pay the expensive premiums.

Who needs a variable life insurance policy?

Due to its high cost, variable life insurance is not the best option for most people. However, if you are looking for a death benefit payout for your family, traditional term life insurance is better because it gives more coverage at a lower price. In addition, the rewards in traditional investments are higher than those in variable life insurance policies. But a variable life insurance policy may be a good fit if you have exhausted all investment options.

Alternatives to variable life insurance

  • In whole life insurance, the death benefit is a set amount. The policyholder makes level payments that go to pay for the policy. Those payments earn interest at a fixed rate.
  • Universal life insurance is similar to whole life insurance. With universal life, the death benefit changes and is not fixed like with whole life. Therefore, the premium can be changed as well.
  • Variable universal life insurance is like universal life insurance, but with different assets. You can choose the assets to invest in, and there is no guaranteed minimum death benefit or guaranteed cash value. 

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Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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