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

Shawn Plummer

CEO, The Annuity Expert

What is Variable Life Insurance?

At its core, variable life insurance is a permanent life insurance product with an investment component. Your premium payments are not just tucked away for your beneficiaries. Instead, they are partially allocated to various investment accounts of your choice, typically mutual funds. The cash value and death benefits are not fixed but vary based on the performance of these investments. This structure is what gives “variable” life insurance its name and distinctive character.

How Does Variable Life Insurance Work?

Here’s where we unravel the mechanics. After purchasing a policy, you allocate your premiums between the insurance component and your chosen investment options. The insurer sets aside a portion to cover administrative costs and mortality charges. The rest goes into separate accounts, functioning similarly to mutual funds, reflecting your risk preference and financial goals.

Your policy’s cash value and death benefit fluctuate based on your investments’ performance. Exceptional returns could significantly increase your benefits, while poor performance may necessitate additional premium payments to keep the policy active.

Variable Life Insurance

The Types of Variable Life Insurance

Delving deeper, we encounter several branches of variable policies, each designed to suit diverse financial landscapes:

  • Variable Universal Life Insurance (VUL): A hybrid model that combines the investment feature of standard variable policies with the flexibility of universal life insurance. You have the liberty to adjust premiums and death benefits and direct the cash value investment into different channels.
  • Variable Whole Life Insurance (VWL): This policy offers more predictability with fixed premiums and a guaranteed minimum death benefit. However, it still allows your cash value to grow based on the performance of investments.
  • Variable Term Life Insurance (VTL): Less common in the marketplace, VTL provides coverage for a certain period with adjustable premiums based on investment returns. It’s a more affordable entry point into variable life insurance but doesn’t build cash value.
FeatureVUL (Variable Universal Life)VWL (Variable Whole Life)VTL (Variable Term Life)
Coverage DurationPermanentPermanentTemporary (fixed term)
Cash Value AccumulationYesYesNo
Investment OptionsYes (sub-accounts similar to mutual funds)Yes (sub-accounts similar to mutual funds)No (generally does not accumulate cash value)
Premium FlexibilityYes (adjustable premiums)No (fixed premiums)Yes/No (depends on specific policy terms)
Death BenefitAdjustableGuaranteed minimum (can increase based on cash value)Fixed (does not increase based on cash value)
Risk LevelHigher (due to investment component)Moderate (cash value depends on investment performance, but death benefit is guaranteed)Low (no investment component)
CostHigher (due to investment options and flexibility)High (fixed premiums, investment management)Lower (no cash value or investment management)
Management InvolvementHigher (policyholder may select investment options)Moderate (limited investment options)Low (no investment choices)

Who Should Consider Variable Life Insurance?

Variable life insurance isn’t a one-size-fits-all solution. It’s best suited for individuals with a higher risk tolerance, given the investment risks akin to those in the stock market. Affluent clients who seek additional investment opportunities, want to supplement retirement income, or need substantial death benefits may find these policies attractive. It’s also pertinent for those desiring a hands-on approach to their policies’ investment aspect.

When is the Best Time to Invest in Variable Life Insurance?

Timing is pivotal. The best time is often when you’re younger, healthier, and can comfortably navigate the investment landscape’s volatility for several years. It’s also prudent when you’ve maxed out other investment avenues like IRAs or 401(k)s and seek additional tax-advantaged growth opportunities.

Related Reading: Discover what life insurance is for and how it can be a crucial part of your financial planning.

Variable Universal Life Insurance (Vul)

The Pros and Cons

Every financial product has its trade-offs, and variable life insurance is no exception.


  • Potential for substantial cash value growth based on investment returns.
  • Tax-deferred earnings, meaning you’re not taxed on any gains until you withdraw funds.
  • Flexible premium options, especially with VUL, allowing adjustments based on your financial circumstances.
  • Opportunity to diversify investments.


  • Investment risks are shouldered by the policyholder, not the insurer.
  • Requires active management and a keen understanding of investment vehicles.
  • Higher fees due to management and administrative costs.
  • Potential for loss of cash value if investments perform poorly.


Variable life insurance, encompassing VUL, VWL, and VTL, presents a distinctive blend of life protection and investment, requiring astute management and risk assessment. This journey is more than a purchase; it’s a strategic investment in your financial future and a legacy for your beneficiaries. Navigating this terrain necessitates a deep understanding and informed decision-making aligned with your long-term goals. In this endeavor, thorough knowledge acts as your guiding compass, ensuring a journey marked by financial growth and the reassurance of securing your family’s future through expert insights.

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Frequently Asked Questions

Can you lose money in a variable life insurance policy?

Yes, you can lose money in a variable life insurance policy if the invested portion performs poorly, reducing the cash value and potentially the death benefit.

Shawn Plummer

CEO, The Annuity Expert

Shawn Plummer is a licensed financial professional, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

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

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