What Is Variable Life Insurance?

Variable life insurance is a permanent life insurance product with separate accounts comprised of various instruments and investment funds, such as stocks, bonds, equity funds, money market funds, and bond funds.

How Variable Life Insurance Works

In some ways, variable life insurance can be described as a form of securities. Why? Because of investment risks, variable policies are considered securities contracts. They are regulated under the federal securities laws. Following the federal regulations, sales professionals must provide a prospectus of available investment products to potential buyers.  

Variable life insurance policies have specific tax benefits, such as the tax-deferred accumulation of earnings. Provided the policy remains in force, policyholders may access the cash value via a tax-free loan. However, unpaid loans, including principal and interest, reduce the death benefit. Additionally, interest or earnings included in partial and full surrenders of the policy are taxable at the time of distribution.

Variable Life Insurance Advantages

An attractive feature of the variable life insurance product is its flexibility regarding premium remittance and cash value accumulation. Premiums are not fixed, as with traditional whole life insurance or term insurance policies. Within limits, policyholders may adjust their premium payments based on their needs and investment goals. For example, if the policyholder remits a premium less than what is needed to sustain the policy, the accumulated cash value compensates for the difference. Although variable life insurance offers this flexibility, it is essential to understand that long-term remittance of reduced premiums can compromise the cash value and the overall status of the policy. Alternatively, policyholders may remit greater premium payments to increase their cash value and investment holdings. 

Unlike whole life insurance, the death benefit is linked to the performance of the separate account funds. A positive aggregate performance could offer increased financial protection to the beneficiary upon the death of the insured.

In addition to the policy's flexibility, the potential for significant investment earnings is another attractive feature. Many policies offer a wide array of investment options ranging from a conservative approach to an aggressive strategy, to suit the needs of most investors.

As an added bonus, a few of the best life insurance companies, such as Prudential and New York Life, offer variable life insurance plans.

Variable Life Insurance Disadvantages

Compared to other life insurance policies, variable life insurance is typically more expensive. Premiums paid help cover administrative fees and the management of the plan's investments. The policyholder may need to increase payments to keep the policy active or to maintain a specific death benefit according to the performance of investment products and the premiums remitted. As a proactive measure, some policyholders submit premiums exceeding the cost of the insurance policy to ensure the guarantees of their policies. Additionally, the policyholder solely assumes all investment risks. The insurer offers no guarantees of performance nor protects against investment losses. The policyholder must exercise due diligence by remaining educated about investments and attentive to the separate account performance. 

Like most life insurance policies, individuals are required to undergo full medical underwriting to obtain a variable life insurance policy. Those people with compromised health or those who have other unfavorable underwriting factors may not qualify for coverage or may realize higher premiums.