Variable life insurance is a special kind of life insurance that combines two important features: a death benefit for your loved ones and a cash value you can invest. While this dual benefit makes the product attractive to some, there are risks involved. Let us break it down in simple terms so you can see if this policy fits your needs.

What Is Variable Life Insurance?

Variable life insurance is a form of permanent life insurance. This means it stays in effect for your whole life as long as you pay the premiums. The cash value component grows based on the performance of the investments you choose. However, since it depends on market conditions, the cash value can go up or down.

Unlike term life insurance, which expires after a specific period, such as 20 or 30 years, variable life insurance does not expire. It also carries a fixed death benefit, meaning the amount your loved ones receive after you die.

How It Works

When you pay your premium, the insurance company divides it into three parts:

• Costs of life insurance to cover your death benefit.
• Administrative expenses and company profits.
• Cash value investments in subaccounts, which are similar to mutual funds.

You can choose how you want to invest the cash value. Investments can be made in everything from stocks to bonds or more conservative vehicles. The insurer does not guarantee the growth of your cash value and is solely determined by your investments.

Variable Life Insurance: Important Features

• Permanent Coverage: Your coverage continues for your lifetime once you pay your premiums.
• Investment Options: You can invest your cash value in various funds.
• Risk and Reward: This type of life insurance offers much greater investment potential than other types, but so is the risk.
• Fixed Premiums: Your premiums remain constant, even at an older age.
• Death Benefit Choices: You can select a level death benefit, equal amount, or benefit that includes your cash value.

Pros of Variable Life Insurance

• Lifetime Coverage: It does not expire like term insurance.
• Higher Growth Potential: Your cash value can grow considerably if your investments do well.
• Tax Advantages: Your cash value grows tax-deferred; you pay no taxes on earnings until withdrawal.

Cons of Variable Life Insurance

• Market Risk: Poor investment performance will decrease your cash value and may even cause the policy to lapse.
• Complexity: You will need to manage and monitor your investments actively.
• High Costs: Premiums are much higher than for term insurance, and the fees are high.

Death Benefit Options

• Level Death Benefit: Pays only the policy’s face value (e.g., $500,000).
• Face Value Plus Cash Value: Adds your cash value to the death benefit but costs more.

Loans and Withdrawals

You can borrow against your cash value, usually up to 90%, but you will need to pay it back with interest. If you do not, the unpaid amount will reduce your death benefit. You can also make withdrawals, but if you take too much, this could risk policy lapse.

How It Compares to Other Insurance Types

• Term Life Insurance: Less expensive, has no cash value. It is best for temporary needs, such as paying off a mortgage or providing for children until they become self-sufficient.
• Whole Life Insurance: Provides cash value growth, though with lower returns than variable life. It is more suitable for conservative individuals.
• Universal Life Insurance: Offers flexibility in premiums and death benefits, though with fewer guarantees.
• Variable Universal Life Insurance (VUL): Combines investment options with flexible premiums and benefits.

Things to Consider Before Buying Variable Life Insurance

• Risk Tolerance: Are you comfortable with market fluctuations affecting your insurance?
• Affordability: Can you handle the higher premiums and potential extra costs if investments perform poorly?
• Alternatives: Would a term policy combined with separate investments better meet your goals?
• Professional Guidance: Work with a fee-only financial advisor to avoid biased recommendations.

How to Pick the Right Policy

• Read the Prospectus: This document explains fees, expenses, and investment options.
• Check Complaints: Utilize the NAIC‘s complaint index to confirm the insurer has a clean record.
• Review Financial Ratings: Confirm the company’s stability with agencies independent of the company, such as A.M. Best or Moody’s.
• Consult an Expert: Employ a disinterested financial planner to assess your policy before you sign up.

Is Variable Life Insurance Right for You?

Variable life insurance is right for those who want:

• Lifelong coverage
• Are comfortable with investment risks.
• Have already contributed the maximum to other tax-advantaged accounts, such as 401(k)s or IRAs.

If your goal is primarily to provide for your family in case something happens to you, a term policy may be a more straightforward and affordable option. Term insurance combined with separate investments generally provides more flexibility and lower costs.

Conclusion

Variable life insurance offers a unique combination of life coverage and investment potential but comes with significant risks and costs. If you are considering it, take the time to compare options and seek professional advice. For many, term life insurance combined with disciplined investing might be the smarter choice.