Variable Life Insurance: An In-Depth Look

Variable life insurance is a unique type of permanent life insurance that offers both a death benefit and a cash value component. Unlike whole life insurance, where the premiums, death benefits, and cash values are fixed and guaranteed, variable life insurance introduces an element of investment risk and potential reward by allowing policyholders to allocate their cash value to various investment options known as subaccounts. This feature can make variable life insurance an appealing option for those seeking both insurance protection and the opportunity to grow their wealth over time. However, it also comes with its complexities and risks that need careful consideration.

Understanding Variable Life Insurance

At its core, variable life insurance combines the traditional elements of life insurance with the flexibility and growth potential of investment products. Here’s a closer look at how it works:

  • Level Premiums for Life: Just like whole life insurance, variable life insurance requires policyholders to pay a level premium for the duration of their lives. This means that the premium amount remains constant throughout the life of the policy, providing a predictable payment structure.
  • Flexible Death Benefit and Cash Value: The death benefit and cash value of a variable life insurance policy are not predetermined or guaranteed. Instead, they fluctuate based on the performance of the chosen investment subaccounts. This means that both the policy’s cash value and the death benefit can increase if the investments perform well, but they can also decrease if the investments perform poorly.

What Are Subaccounts?

A subaccount is essentially a mutual fund-like investment option within a variable life insurance policy. These subaccounts are professionally managed pools of investor funds that pursue specific investment objectives, such as growth, income, or a balanced approach. Policyholders have the flexibility to choose and allocate their cash value among these subaccounts based on their risk tolerance, financial goals, and investment preferences.

Advantages of Variable Life Insurance

  • Potential for Higher Returns: One of the main attractions of variable life insurance is the potential for higher returns on the cash value component. By investing in subaccounts, policyholders have the opportunity to grow their cash value more significantly than they would with the fixed returns of whole life insurance.
  • Investment Flexibility: Variable life insurance policies offer a wide range of subaccount options, allowing policyholders to tailor their investments to their individual risk tolerance and financial goals. This flexibility can be particularly appealing to those who are knowledgeable about investing and comfortable managing their investment portfolio.
  • Tax-Deferred Growth: The cash value growth in a variable life insurance policy is tax-deferred, meaning that policyholders do not have to pay taxes on the investment gains as long as they remain within the policy. This can provide a tax-efficient way to build wealth over time.
  • Death Benefit: Despite the fluctuations in cash value, variable life insurance still provides a death benefit to the policyholder’s beneficiaries. This ensures that the primary purpose of life insurance—providing financial protection to loved ones—is maintained.

Risks and Considerations

While variable life insurance offers several advantages, it is important to understand the associated risks and considerations:

  • Investment Risk: The value of the policy’s cash value and death benefit is directly tied to the performance of the chosen subaccounts. Poor investment performance can lead to a decrease in cash value and a reduced death benefit, which can be a significant risk for policyholders seeking stable financial protection.
  • Higher Fees: Variable life insurance policies typically come with higher fees compared to other types of life insurance. These fees can include administrative fees, investment management fees, and mortality and expense risk charges. It is important for policyholders to carefully review the fee structure and understand how it impacts their overall returns.
  • Complexity: Variable life insurance policies can be complex, requiring a thorough understanding of both life insurance and investment principles. Policyholders need to be comfortable managing their investments and making informed decisions about subaccount allocations.
  • Policy Lapse Risk: If the cash value of the policy decreases significantly due to poor investment performance and the policyholder is unable to pay the required premiums, the policy may lapse. This means that the policyholder could lose both the insurance coverage and the accumulated cash value.

How to Choose the Right Subaccounts

Selecting the right subaccounts is a crucial aspect of managing a variable life insurance policy. Here are some tips to help policyholders make informed decisions:

  • Assess Your Risk Tolerance: Consider your risk tolerance and investment goals when choosing subaccounts. If you are risk-averse, you may prefer more conservative investment options. If you are comfortable with higher risk for theVariable Life Insurance potential of higher returns, you may opt for more aggressive subaccounts.
  • Diversify: Diversification is key to managing investment risk. Allocate your cash value across a variety of subaccounts with different investment objectives and asset classes to spread out risk and enhance the potential for stable returns.
  • Review Performance: Regularly review the performance of your chosen subaccounts and make adjustments as needed. Keep in mind that past performance is not indicative of future results, but monitoring performance can help you make informed decisions.
  • Seek Professional Advice: Consider working with a financial advisor who has experience with variable life insurance policies. An advisor can help you understand your options, assess your risk tolerance, and develop an investment strategy that aligns with your financial goals.

Comparing Variable Life Insurance with Other Types of Life Insurance

To determine if variable life insurance is the right choice for you, it’s helpful to compare it with other types of life insurance:

  • Whole Life Insurance: Whole life insurance offers guaranteed death benefits and cash value accumulation with fixed premiums. It provides stability and predictability but typically has lower potential for cash value growth compared to variable life insurance.
  • Term Life Insurance: Term life insurance provides coverage for a specified period, such as 10, 20, or 30 years. It does not have a cash value component and is generally more affordable than permanent life insurance. Term life insurance is ideal for those seeking temporary coverage without an investment component.
  • Universal Life Insurance: Universal life insurance offers flexible premiums and adjustable death benefits, with a cash value component that earns interest based on market rates or a fixed rate. It provides more flexibility than whole life insurance but does not offer the same investment options as variable life insurance.

Variable life insurance is a versatile and potentially rewarding financial product that combines life insurance protection with investment opportunities. By allowing policyholders to allocate their cash value to various subaccounts, it offers the potential for higher returns and greater financial growth. However, it also comes with investment risks, higher fees, and complexities that require careful consideration and management.

For those who are comfortable with investing and seeking both insurance coverage and the potential for cash value growth, variable life insurance can be a valuable addition to their financial portfolio. It is important to thoroughly understand the policy’s features, assess your risk tolerance, and seek professional advice to ensure that variable life insurance aligns with your long-term financial goals and provides the protection and growth you need.

If you believe life insurance may fit your situation, consulting with a financial professional may help with making a decision. Use our Find a Licensed Advisor section to connect directly with an independent financial professional, and to request a personal strategy session to discuss your needs and goals. And should you have any questions or concerns, call 877.476.9723.

🧑‍💼Authored by Brent Meyer, founder and president of, with over 20 years of experience in retirement planning and annuities. Learn more about my extensive background and expertise here

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