Variable Life Insurance: What You Need to Know

Variable life insurance is a type of permanent life insurance that offers more flexibility and control over investment decisions compared to traditional whole life insurance. While the primary purpose of life insurance is to provide financial protection for your loved ones in the event of your death, variable life insurance goes a step further by combining this protection with investment opportunities. If you’re considering this option, here’s what you need to know to make an informed decision.

What is Variable Life Insurance?

At its core, variable life insurance provides lifelong coverage as long as the policy remains in force. It also includes a cash value component that grows based on the performance of investment options chosen by the policyholder. Unlike term life insurance, which only provides a death benefit, variable life insurance gives policyholders a chance to grow their policy’s cash value over time by investing in a variety of sub-accounts, which function similarly to mutual funds.

How Does It Work?

With a variable life insurance policy, a portion of your premium goes toward paying for life insurance coverage, while the remaining portion is invested in the sub-accounts you select. These sub-accounts can include stocks, bonds, money market funds, or a combination of various asset classes. The performance of these investments determines the growth (or loss) of the cash value of your policy.

The key feature here is the variable nature of the policy—your cash value isn’t fixed and fluctuates depending on how well your investments perform. This can be both an advantage and a risk. If your investments perform well, your cash value will grow more quickly, but if they perform poorly, your cash value can decrease. However, the death benefit usually has a minimum guaranteed amount, even if the cash value declines.

Advantages of Variable Life Insurance

Investment Growth Potential: The ability to invest in sub-accounts provides an opportunity for your cash value to grow significantly if your chosen investments perform well. This growth potential makes it attractive to those who want more control over their investments.
Tax-Deferred Growth: Like other permanent life insurance policies, the cash value in a variable life insurance policy grows on a tax-deferred basis, meaning you won’t pay taxes on any investment gains until you withdraw the money.
Flexible Premiums: Depending on the policy’s performance and how much cash value has accumulated, you may be able to adjust your premium payments over time. For example, if your cash value grows significantly, you could potentially use those funds to cover future premiums.
Lifetime Protection: As long as you keep up with your premiums, your beneficiaries will receive a death benefit when you pass away, providing long-term financial security for your family.

Disadvantages of Variable Life Insurance

Market Risk: Since your policy’s cash value is tied to investments, there’s a risk of loss if the market performs poorly. In extreme cases, this can affect the policy’s ability to stay in force, especially if poor investment returns reduce the cash value to the point where it can no longer cover the cost of insurance.
Fees and Expenses: Variable life insurance tends to have higher fees compared to other types of life insurance, mainly due to the investment component. These fees can include management fees for the investment accounts, mortality and expense risk charges, and administrative costs.
Complexity: With the ability to invest in different sub-accounts, variable life insurance can be more complicated than other life insurance products. It requires regular monitoring of investments and may involve more active decision-making.

Is Variable Life Insurance Right for You?

Variable life insurance is best suited for those who are comfortable with investing and can tolerate the ups and downs of the market. It appeals to individuals who want a life insurance policy that also functions as a long-term investment vehicle, providing the potential for growth beyond the fixed rates offered by traditional whole life insurance.

However, it’s essential to assess your financial goals, risk tolerance, and ability to pay potentially higher premiums before opting for variable life insurance. If you’re looking for guaranteed growth and a simpler policy, other types of permanent life insurance, such as whole or universal life, might be a better fit.

Final Thoughts

Variable life insurance offers a unique blend of investment opportunities and life insurance protection, giving policyholders a chance to grow their policy’s cash value through market investments. However, with the potential for higher rewards comes the risk of loss, so it’s crucial to understand how these policies work and whether they align with your financial goals. As always, consulting with a financial advisor can help you navigate the complexities of variable life insurance and ensure it’s the right choice for your situation.