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Variable Life Insurance: What Is It & How Does It Work?

Last updated 03/19/2024 by

Lacey Stark

Edited by

Fact checked by

Variable life insurance is a kind of permanent life insurance that also has investment options. It’s one of the more expensive forms of life insurance, but it gives you more flexibility and control over how the policy’s cash value is invested. Like other investment products, variable life insurance has risks, but it offers the potential for a higher rate of return than other life insurance policies. However, an abundance of management fees associated with the investment component of variable life insurance may put this type of policy out of reach for many people.
Especially if you have people who depend on you, getting a life insurance policy should be on your list of things to do. However, it can be difficult to decide which kind of policy is right for you and your family. In some cases, the less expensive term life insurance might be the way to go, but if you want the benefits of a policy’s cash value, permanent life insurance could be a smarter choice.
Read on to learn more about how variable life insurance works, how it differs from other permanent life insurance policies, and whether a variable life policy is right for you. We’ll also take a look at the differences between variable and variable universal life insurance policies.

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What is variable life insurance?

Variable life insurance is a type of permanent life insurance policy that contains an investment element. Like other permanent insurance policies, variable life insurance has a death benefit amount and a cash value. Unlike other life insurance policies, it gives you investment options, similar to mutual funds, to optimize the policy’s cash value account.
The point of a variable life insurance policy is threefold:
  1. To meet your insurance needs
  2. To achieve your investment goals
  3. To satisfy your tax planning objectives
It’s an insurance policy that pays a death benefit to your beneficiary at the time of your passing, it builds cash value over time, and it can have tax benefits, such as its gains growing on a tax-deferred basis.
It should be noted that any type of permanent insurance, like a variable life policy, is meant to give the policyholder coverage until they die and has a cash value. This differs from a term life policy, which has no cash value and expires after a set period of time (usually between 10 and 30 years).

Pro Tip

Be sure that you’re dealing with a reputable insurance company. Before you sign anything, the insurance company should provide you with a prospectus that contains important information about the variable life insurance policy, including fees and expenses, investment options, death benefits, and other features.

How does variable life insurance work?

When you purchase a variable life insurance policy, a portion of your premium payment will go towards your insurance coverage (the death benefit) and fees associated with administrative and sales costs. The remainder of your premium is deposited into a cash value account that works kind of like a brokerage account.
From your cash value account, you can choose where to put your money from an assortment of investment options, which are similar to mutual funds. If those sub-accounts perform well, your cash value increases. On the flip side, if your accounts have poor investment performance, your policy’s cash value will decrease. And if the cash value dwindles to nothing, your policy could be terminated.
To help avoid that, you also have the option to put some of your cash value into a fixed account, where you will have a guaranteed rate of return that reduces the overall risk of the policy. However, if you wind up putting most of your money into conservative investments like a fixed account, then it basically defeats the purpose of having variable life insurance policies in the first place.
Generally speaking, life insurance is not the strongest investment strategy on its own. The benefit comes from the policy itself, and the death benefit provided to loved ones after the policyholder has passed away.” — Jiten Puri, CEO of

Variable life vs. variable universal life insurance

Variable insurance and variable universal life insurance are closely-related insurance products, but they aren’t exactly the same. It’s important to know the difference as you shop around for the best type of variable life insurance policy for you.
The two policies are alike in that they both have investment options that are similar to mutual funds. This allows for potentially higher growth of your policy’s cash value than you get with other insurance policies. And, because of the unique investing feature, policyholders also take on more risk because they do not have a guaranteed rate of return due to market fluctuations.
One of the main differences between variable life insurance and variable universal life insurance is the way death benefits work. With a variable insurance policy, the death benefit has a guaranteed minimum (which can also be increased based on your policy’s cash value). The variable universal life insurance policy, on the other hand, has a flexible death benefit, meaning there isn’t a guaranteed minimum death benefit amount. Having said that, while variable universal life insurance policies do offer flexible death benefits, they typically have a guaranteed minimum death benefit, similar to variable life insurance policies. The flexibility lies in the ability to increase or decrease the death benefit based on the policyholder’s needs and cash value performance.
Another difference is that, in general, variable universal life insurance tends to have slower growth potential than variable life insurance. In addition, variable universal life has flexible premium payments, whereas variable life has fixed payments.
In any event, you’ll want to carefully review policy terms — perhaps with the help of an unbiased financial professional — to make certain you know exactly what you’re buying into and know all of the potential risks.

Pros and cons of variable life insurance

Like any investment, variable life insurance has some upsides and downsides. Before purchasing a policy, make sure you look at the pros and cons of variable life insurance.
Here is a list of the benefits and drawbacks to consider.
  • Better control and variety of investment options
  • Potential for higher growth of the cash value accounts
  • Some policies have flexible premium payment options
  • Policy’s death benefit is not subject to federal income tax
  • Higher fees than most life insurance products
  • Potential to lose money in your cash value account
  • Can be terminated if you don’t maintain sufficient cash value
  • No guaranteed rate of return
  • May end up paying federal income taxes if policy loans are not paid back at the time of termination
  • Death benefits may be subject to federal estate tax

Pro Tip

State and federal tax rules that concern variable life insurance policies can be complicated. Before investing in a variable life insurance policy, you may want to talk with a tax professional or investment advisor about the tax consequences of this type of life insurance.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

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Is variable life insurance a good idea?

Whether a variable life insurance policy is good for you is a very personal choice and depends a lot on your financial and investment goals, income, family situation, and other factors.
For example, if you already max out your contributions to your tax-advantaged retirement accounts, such as an IRA or 401(k), investing in variable life insurance policies might make sense because of the death benefit paid and tax benefits. That said, it’s an expensive policy. If you don’t really need the death benefit, for instance, a variable life insurance policy might not be a sensible investment choice.
“Generally speaking, life insurance is not the strongest investment strategy on its own. The benefit comes from the policy itself, and the death benefit provided to loved ones after the policyholder has passed away, ” says Jiten Puri, CEO of “Life insurance with an investment component, like variable life insurance, is a plus but is secondary to the life insurance itself.”
If your risk tolerance is low and you don’t think you can afford the significant ongoing fees that come with variable life insurance policies, you may be better off with term or whole life insurance. You could then use the money you save to invest in a much wider variety of mutual funds, exchange-traded funds (ETFs), or other investment options.
IMPORTANT! If all you’re looking for from your insurance is a death benefit, you may find variable life insurance unsuitable for your needs. Instead, a term life insurance policy might be a better (and cheaper) move.


What are the tax consequences of variable life insurance policies?

There are some tax advantages when you have variable life insurance. For one thing, cash value gains grow on a tax-deferred basis. In addition, you can withdraw from the cash value — in the form of loans using the cash value as collateral — tax-free.
However, keep in mind that, if you simply withdraw money from the cash value, you may owe federal income taxes on those funds.

What happens if you don’t pay back policy loans from the cash value?

If you don’t pay back policy loans from the cash value of your life insurance policy, several consequences can occur:
  • Reduced death benefit. The outstanding loan amount, along with any accrued interest, will be deducted from the death benefit payable to your beneficiaries upon your death. This means your beneficiaries will receive a lower payout than the original death benefit.
  • Tax implications. If the policy is terminated, surrendered, or lapses due to insufficient cash value to cover the loan and interest, the unpaid loan amount may be considered taxable income. In this case, you may be required to pay income taxes on the difference between the loan amount and your policy’s cost basis (the total premiums paid into the policy).
  • Potential policy lapse. If the loan balance and interest continue to grow and eventually exceed the cash value of your policy, your policy may lapse, leaving you without life insurance coverage. To prevent this from happening, you may need to pay additional premiums, repay the loan, or adjust the policy’s terms.

What do flexible premium payments mean?

Most insurance policies have fixed premiums, meaning you pay the same amount each year. But, depending on your variable life insurance policy terms, you may have more flexibility on how you pay premiums. For example, you can use your policy’s cash value to pay all or a portion of your premiums, assuming you have sufficient cash value in your account.
You could also pay more than your target premium if you want to build up your cash value faster. This can be an attractive option for those who can afford it now and avoid paying life insurance premiums later in life. Presumably, you’ll have a smaller income when you retire, so not having to pay premiums out of pocket during retirement might be a nice perk.
A further option that some variable universal policies offer is a single premium, which pays for the death benefit coverage and funds the cash value account with one payment. This requires a lot of upfront cash, but you can add to the cash value investment account if you want to.

What is the difference between whole life and variable life?

Both variable life insurance and whole life insurance policies offer lifetime protection, cash value, and a death benefit. However, a whole life insurance policy has lower fees in addition to lower risks and rewards.
By comparison, the only major drawback of whole life insurance is that the policy’s cash value does not have the potential for significant growth.

Key Takeaways

  • Variable life insurance policies are a type of permanent life insurance that offers policyholders investment options that you can’t get with other insurance products.
  • The policy’s cash value component can affect the death benefit because payouts are influenced by the underlying investment options.
  • Variable life and variable universal life policies are more suited to those with higher incomes, investment experience, and higher risk tolerance.
  • Depending on your financial goals, a different type of life insurance policy might make more sense, freeing up your cash for other types of investing.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

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