Variable Life Insurance: Understanding the Pros and Cons (2024)

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.

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.

Read more: Life Insurance Retirement Plans (LIRP)

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.

Case Studies: Understanding the Pros and Cons of Variable Life Insurance

Case Study 1: John’s Investment Success

John, a 45-year-old investor, decided to purchase a variable life insurance policy to complement his long-term investment goals. He carefully selected various markets and sub-accounts to invest his policy’s cash value.

Over the years, John experienced significant gains in his investments, which allowed his policy’s cash value to grow faster than any other permanent policy. This success provided John with a substantial death benefit and tax-free income after retirement.

However, John acknowledges that his investment strategy involved risks and required constant monitoring of market performance.

Case Study 2: Sarah’s Risky Decision

Sarah, a 35-year-old individual, was attracted to the investment potential of variable life insurance. She purchased a policy without fully understanding the risks involved. Unfortunately, due to a downturn in the market, Sarah’s investments underperformed, leading to a decrease in her policy’s cash value.

As a result, the death benefit remained stagnant, and Sarah did not receive the returns she expected. This case highlights the importance of thoroughly understanding market fluctuations and the potential consequences of investment decisions when considering variable life insurance.

Case Study 3: Mark’s Conservative Approach

Mark, a 50-year-old investor, opted for a traditional whole life insurance policy instead of variable life insurance. He prioritized stability and guaranteed returns over the potential for higher investment gains.

While Mark’s policy accumulated cash value at a fixed interest rate, he recognized that the returns might be lower compared to variable life insurance. However, Mark felt more comfortable with the predictability and reduced risk associated with his chosen policy.