Variable Life Insurance: Understanding the Pros and Cons
Quick Facts
Cash values of variable life insurance policies can grow at faster rates than any other permanent policy
Variable life insurance rates are more expensive than other types of whole or term life insurance
Your eligibility for variable life insurance depends on your age, lifestyle, and medical history
What is a variable life insurance policy? Some describe it as a type of permanent life insurance, but the best variable life insurance definition is that it’s one of the riskiest types of life insurance you can buy.
Like all whole life policies, variable life insurance (VLI) builds cash value that often meets or exceeds the death benefit amount by the time the policy matures. However, policyholders can invest VLI in multiple markets of their choice, potentially earning much more than the standard fixed interest rate.
The risk is that gains depend entirely on market performance. So protect your investments by understanding the pros and cons of variable life insurance.
Use this guide to compare variable whole life against other types of life insurance, including the similar universal variable life insurance, to see if this policy fits into your portfolio.
How does variable life insurance work?
What is variable life insurance? Variable life insurance works like whole life insurance in the following ways:
It guarantees death benefits for the policyholder’s entire life.
It comes with fixed monthly rates that won’t increase with age.
It builds cash value you can borrow against or use to pay future premiums.
However, the unique definition of variable life insurance centers around its cash value and market investment opportunities.
Only a variable insurance policy allows you to invest the cash value in different markets and sub-accounts. Policyholders can choose which accounts to invest in, but earnings depend on market performance.
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What are the pros and cons of a variable life insurance policy?
The biggest advantage of variable life insurance is the investment potential. The cash values of variable life insurance policies can grow faster than any other permanent policy, and you can choose where to invest.
Weigh the VLI pros and cons below to understand better how this policy works.
Variable life insurance isn’t for everyone and can cost policyholders more than beneficiaries receive if you aren’t familiar with the market. We recommend speaking to a financial advisor before buying a policy.
Advantages of Variable Life Insurance
Along with diversifying your investments, you can also borrow against the cash value or use the VLI sub-accounts as loan collateral. These withdrawals and loans are tax-deferred, providing you with tax-free income after retirement.
Different types of variable life insurance come with many other advantages, including:
Flexible death benefits. Unlike other whole life insurance policies, death benefits on a variable policy can increase based on market performance and investment strategy.
Flexible premiums. Policyholders can adjust their annual life insurance rates based on personal needs and financial goals. The policy’s cash value will cover the difference if you pay less, while paying more can increase the cash value.
The perk with flexible premium variable life insurance is that your rates never change due to old age or deteriorating health. However, as the policyholder, you can adjust your monthly or annual payments based on your investment goals.
The downside is you risk going below the minimum amount if you continue to pay less than your annual rates. For example, some life insurance companies require minimum death benefits to keep the policy active, and you risk a coverage lapse.
Disadvantages of Variable Life Insurance
VLI death benefits and cash value depend on market fluctuations, so insurance companies commonly require maintaining minimum death benefits.
Most policyholders pay higher than their monthly rates to cover the policy and associated fees. Otherwise, payments and fees subtract from investment gains. The disadvantage is that variable life insurance rates are already more expensive than average.
Market performance is volatile, and your life insurance company can’t guarantee investments. Therefore, you risk losing money if your investments don’t work out the way you planned.
Along with higher rates and increased risk, VLI policies are harder to qualify for than term life or traditional whole life policies. You must undergo a full medical exam, and most insurers won’t accept anyone with a standard or substandard class rating. Learn more about life insurance rating classes to see if you qualify.
Compare Variable Insurance Products
Now that you understand more about variable life insurance, you can compare your findings against other life insurance products, including term life and variable universal life.
Another critical difference between all these policy types is the cost of coverage. Term life insurance rates are the cheapest because there’s no cash value, and coverage is short term. However, whole life and universal life insurance still cost less than VLI.
That’s why shopping around with multiple companies and comparing life insurance quotes for different policies is important to find coverage at a price that works for you.
Use our comparison tool below to get free quotes, or scroll down for more details on the differences between variable life insurance and other life insurance policies.
The Difference Between Variable vs. Term Life Insurance
A variable insurance policy is permanent life insurance, so coverage lasts your entire life. Term life insurance only lasts for a set term, typically between 15 and 30 years.
Term life covers short-term debts for your family, such as mortgages or business loans, should you die suddenly or become unable to work. On the other hand, variable life works to complement your long-term investment goals while still providing death benefits to your loved ones.
These investment opportunities are another important difference between variable and term life insurance. There’s no such thing as variable term life insurance because term life products don’t have an investment component — only whole life insurance can build cash value.
The Difference Between Variable Life vs. Whole Life Insurance
Whole life and variable life build tax-deferred cash value. Both policies provide lifetime coverage and have fixed rates that won’t increase as you age. However, only variable whole life lets you invest the cash value in securities.
For this reason, you can earn more money with a variable life policy — the disadvantage is the risk. The cash value of traditional whole life insurance might only earn a low, fixed interest rate, but that interest is guaranteed. Earnings on variable insurance depend on the market.
The Difference Between Variable Life vs. Variable Universal Life Policies
What is variable universal life insurance? Variable universal life (VUL) policies are a type of flexible premium life insurance discussed in the previous section.
Policyholders can also use the VUL cash value and death benefits to cover premium payments later in life. However, doing so risks depleting the policy and leaving nothing behind for your beneficiaries.
The biggest difference between variable life and VUL is guaranteed death benefits. Monthly rates for a variable whole life policy are considerably higher because coverage guarantees a minimum death benefit regardless of market performance.
Compare whole vs. universal life insurance to learn more about variable universal life insurance pros and cons.
Understanding the Pros and Cons of Variable Life Insurance
Variable life insurance is a type of whole life policy providing unique and lucrative investment opportunities. Policyholders can invest their VLI cash value component into any market or account they choose, but gains depend on market performance.
VLI isn’t a very popular policy due to this high risk level. Instead, term life insurance is the most common type of life insurance people buy, but you may need lifetime coverage that builds onto your investment portfolio.
Consider your needs and what each policy offers before buying variable life insurance.
Frequently Asked Questions
How does a variable life insurance policy work?
Variable life insurance works like whole life insurance by guaranteeing death benefits for the policyholder’s entire life with fixed annual rates that don’t increase with age. VLI also builds cash value, which you can borrow against later or use to pay future premiums.
The big difference between variable and whole life is that policyholders can invest this cash value into the markets of their choice instead of just earning a low fixed interest rate.
What are the risks of variable life insurance?
Since VLI investments depend entirely on market performance, you risk losing money if your strategy doesn’t perform as planned. However, the potential gains outweigh the risks, making variable life insurance a viable option for someone who understands the market and wants to boost their death benefits.
Can you take money out of a variable life insurance policy?
Yes, borrowing against or using VLI as collateral for a loan is a lucrative way to guarantee income in your later years. Borrowed money from a variable life insurance policy isn’t taxed, but you’ll have to pay a fee.
How is variable life insurance closer to a security than an insurance policy?
Variable life insurance is regulated by the Securities and Exchange Commission (SEC) because it contains multiple, separate investment accounts instead of a cash-value component like other permanent policies.
The SEC requires life insurance agents to provide a prospectus to policyholders interested in buying variable life insurance. It lists details of each investment offering so you can make an educated decision. Failure to show a prospectus or deliberately giving misleading information can cost the insurance company fines.
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Rachael Brennan has been working in the insurance industry since 2006 when she began working as a licensed insurance representative for 21st Century Insurance, during which time she earned her Property and Casualty license in all 50 states.
After several years she expanded her insurance expertise, earning her license in Health and AD&D insurance as well. She has worked for small health in…
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Written by
Rachael Brennan
Licensed Insurance Agent
Benjamin Carr was a licensed insurance agent in Georgia and has two years’ experience in life, health, property and casualty coverage. He has worked with State Farm and other risk management firms. He is also a strategic writer and editor with a background in branding, marketing, and quality assurance. He has been in military newsrooms — literally on the frontline of journalism.
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Reviewed by
Benji Carr
Former Licensed Life Insurance Agent
