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All About Variable Life Insurance Policies

Variable life insurance policies are uniquely constructed with flexibility as a primary feature. Policies include a guaranteed death benefit and a cash value component. The policy owner can decide to pay more or less on the premium and choose the types of investments. The insurer invests some of your money into the financial markets with a variable life policy. In the best-case scenario, your money will grow, yet you risk losing some or all of your investment.

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Variable life insurance definition

Variable whole life insurance can be described as guaranteed lifetime protection offering a specified death benefit along with cash value and flexible payments.

How does it differ from whole life insurance? With a whole life insurance policy, the premium is fixed and never increases. In contrast, you may pay more or less than the stated premium on a variable life insurance policy.

A variable life insurance policy can bolster your financial portfolio by:

  • Helps you execute your financial plan
  • Meeting your life insurance needs
  • Assisting in tax planning

How does variable life insurance work?

The insurer will invest some of the premium into mutual funds or other investment vehicles. Part of the money will be allocated for the policy fees and other expenses. The cash value will increase or decrease depending on how the market performs.

The interest rate may fluctuate based on market performance, yet insurance companies usually offer a guaranteed minimum interest rate.

The amount of money your life insurance policy makes depends on three things:

  1. The amount of the premiums you pay
  2. The cost of the policy fees and expenses
  3. The performance of the investments you choose

The policy must always have enough cash value to pay its fees and expenses, or it could be canceled.

Understanding interest and avoiding cancellation

A couple of examples will clarify how a variable life insurance policy works and highlight the importance of monitoring your policy.

Suppose you bought a variable life insurance policy and paid $50,000. You allocated 40% ($20,000) to stocks and the other 60% ($30,000) to bonds.

Over the next year, the stock fund's rate of return was 5%, which increased that portion of the fund by $1,000.

The bond fund had a 10% rate of return, which increased that portion of the fund by $3,000. Your $50,000 investment would have grown by $4,000 over the year. Although, the interest would be less after the insurance company deducted the fees and expenses.

The following chart will clarify this example:

Type of investmentAllocationAnnual gain
Stocks with 5% interest $20,000$1,000
Bond with 10% interest$30,000$3,000

Table chart of how interest accrues on a variable life insurance policy.

How well your policy performs depends on the investment options you choose. If the stocks or bonds lose money, your policy loses money in addition to the fees and expenses you already have to pay. While the first example shows a well-performing variable insurance fund, your policy is at risk of lapsing if you don’t monitor it. If the fees and expenses are more than the cash value, the policy will be canceled.

For example, if your policy has a value of $18,000 and the fees and expenses are $6,000 per year, the policy will lapse in three years. The death benefit and cash value would be gone.

Flexibility of premiums

Unlike other types of life insurance policies, the premiums on a variable life insurance policy are adjustable.

The flexibility works this way:

  • Pay the full premium or more to boost the cash value faster.
  • Pay part of your premium and use the cash value to pay the rest.
  • Pay nothing and let the cash value pay the entire premium.

You can also take a loan out on your policy or withdraw some of the cash value.

As a word of caution, whenever you deplete the cash value for any reason, the policy expenses could put the policy into a lapse status.

Comparison with other types of life insurance

The task of choosing the right life insurance type is easier when you understand the features of each.

Type of insuranceLength of policyFixed premiumsCash valueGuaranteed death benefit
Term life5, 10, 20, 25, 30 yearsYesNoYes
Whole lifeEntire lifeYesYesYes
Variable universal lifeEntire lifeNoYesNo
Variable lifeEntire lifeNoYesYes

Features of term, whole life, variable universal life, and variable life insurance policies.

Depending on your circumstances and financial goals, one of the following basic types of life insurance may suit your needs.

  • Term life insurance are time-limited policies where the premiums and death benefit are fixed and there is no cash value component.
  • Whole life insurance policies are life-long policies with a fixed premium, guaranteed death benefit, and a cash value component.
  • Variable life insurance policies are life-long policies with a flexible premium, guaranteed death benefit, and a cash value component.
  • Universal life policies are life-long policies that have a flexible premium, changeable death benefit, and a cash value component.

Pros and cons of variable life insurance

A variable life insurance policy isn’t for everyone. Compare the pros and cons below to see if the benefits outweigh the disadvantages in your financial planning.


The following definitions will help you to understand some of the common terms related to variable life insurance policies.

  1. Cash value. Money that earns interest on a life insurance policy.
  2. Death benefit. The death benefit stated on the policy minus the cash value.
  3. Lapse. Cancellation of a policy due to failure to pay the premium.
  4. Premium. Payments toward the policy.

Final thoughts

A variable life insurance policy is a good choice for someone who wants flexibility and is willing to actively monitor their policy. Be aware of the fees. expenses. and tax implications, and be sure to keep sufficient cash value in the policy to avoid cancellation. To learn more about other life insurance products, check out our other articles on Healthnews.


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