If you are shopping for permanent life insurance, you may be considering variable life insurance. This type of coverage offers a fixed death benefit and a cash value account that can be invested in multiple subaccounts, with the potential for tax deferred growth.
Below is an overview of how variable life insurance works, along with its possible benefits, drawbacks, and key factors to consider when deciding if it fits your needs.
What Is Variable Life Insurance?
When shopping for life insurance, you can choose from several policy types. Variable life insurance is a form of permanent life insurance.
Length of Coverage
It helps to understand the differences between permanent and term life insurance.
- Permanent life insurance lasts your entire life as long as premiums are paid.
- Term life insurance covers a set period of time.
With permanent coverage, your policy pays a death benefit to beneficiaries regardless of when you pass away.
Cash Value of Permanent Life Insurance
Permanent life insurance typically costs more than term life insurance, but it offers additional features, including cash value.
As you pay premiums, your policy potentially builds cash value over time. This creates equity within the policy. Term life insurance works differently.
- Premiums only pay for coverage.
- Coverage ends when the term expires.
- No cash value builds.
- No death benefit is paid if the policy expires before death.
Investing Your Cash Value
Variable life insurance includes an investment option tied to the cash value.
- Cash value can be invested in sub accounts.
- Sub accounts function similarly to mutual funds.
- Investment growth may occur tax free.
Investment performance affects cash value. These investments carry risk and may lose value depending on market conditions.
How Does Variable Life Insurance Work?
Like other types of life insurance, variable life insurance provides a death benefit that pays out to your beneficiaries when you die. What sets it apart is how the cash value works and how much control you have over it. Key features include:
Cash Value Investing Choices
You can choose how to invest the cash value from a menu of investment options. As you pay premiums over time, the cash value can grow. For example, paying a $400 monthly premium could result in about $4,800 in cash value after one year, minus insurer fees.1 The primary fee covers the cost of the insurance protection.
Greater Investment Control
Once cash value builds, you decide how it is invested. This differs from a whole life policy, where the insurance company manages the investments and returns are typically more modest. With variable life insurance, cash value is invested in subaccounts that may include stocks, bonds, and other variable investments.2
Fixed Interest Option
Some policies allow you to place cash value in an account that earns a fixed interest rate set by the insurance company. These returns are usually lower than stock or bond focused options but are more predictable and not affected by market swings.
What Are Some Potential Benefits of Variable Life Insurance?
Variable life insurance provides financial support to beneficiaries after the insured’s death, similar to other life insurance types. It also includes features that may appeal to those seeking long term coverage with added flexibility.
Potential benefits include:
- Lifetime Coverage: As long as premiums are paid, the policy stays in force and the death benefit remains available whenever the insured passes away.
- Potential Cash Value Accumulation: Unlike term life insurance, variable life insurance builds cash value over time.
- Investment Flexibility: Policyholders can choose how the cash value is invested. This hands on approach comes with more risk, but strong investment performance may lead to higher growth than a whole life policy.
- Potential tax advantages: Cash value growth may be tax deferred, with taxes generally owed only when funds are withdrawn. Beneficiaries typically do not pay federal income tax on the death benefit, which may support certain tax planning goals.
Variable life insurance offers both protection and growth potential. Request a Free Life Insurance Quote
What Are the Potential Drawbacks of Variable Life Insurance?
Variable life insurance has several potential drawbacks that are worth understanding before choosing a policy:
- Higher Costs and Fees: Variable life insurance often has higher expenses and fees than other types of life insurance. These costs can reduce your policy’s cash value and may change over time. Ask your financial professional or insurer for clear details on how policy costs and account fees are structured.
- Not Suited for Short Term Savings: This type of policy is not designed for short term savings goals. Life insurance primarily exists to provide a death benefit for beneficiaries. If you are looking for a shorter time horizon, a financial professional can help evaluate other options.
- Risk of Investment Loss: When cash value is invested in variable options, there is a risk of loss. Poor investment performance can reduce the value of the policy. If this level of risk is not a good fit, other alternatives may be more appropriate.
- Complex Tax Treatment: While tax rules can be favorable for some policyholders, variable life insurance is subject to many tax rules. Depending on your situation, the tax treatment may not be beneficial. It is important to understand how a policy is taxed before purchasing.
- Higher Premiums Than Term Life Insurance: Permanent life insurance, including variable life insurance, generally costs more than term life insurance. For some people, the higher premiums may not fit comfortably within a monthly budget.
How Much Does a Variable Life Insurance Policy Cost?
The cost of a variable life insurance policy depends on several personal factors, including:
- Age
- Gender
- Lifestyle considerations such as smoking
- Family health history
- Occupation
- Death benefit amount
Premiums for permanent life insurance policies are generally higher than term life insurance premiums. Variable life insurance premiums also tend to be higher than whole life insurance premiums because of additional fees tied to managing investment options.
To understand what a variable life insurance policy may cost for you, consider speaking with a financial professional. They can help you review variable life insurance quotes based on your individual needs and considerations.
Is Variable Life Insurance a Good Choice for You?
Variable life insurance is not a good fit for everyone. However, it may be worth considering depending on your goals and preferences.
You may consider a variable life insurance policy if the following apply to you.
You Want Permanent Coverage
You prefer a permanent life insurance policy instead of a term policy. Permanent policies, including whole life and variable life insurance, are designed to last your entire life as long as premiums are paid. Your beneficiaries receive a death benefit no matter when you pass away. Permanent policies also include a cash value, which term life insurance does not offer.
You Are Focused on Long Term Growth
Variable life insurance is not intended for short term investing. If you are planning with a longer time horizon, this type of policy may support your financial goals. As premiums are paid, the policy builds cash value, unlike term life insurance, which expires without value.
You Prefer an Active Investing Role
You like managing investments and staying involved in your financial decisions. Variable life insurance allows you to allocate funds among sub account options that work similarly to mutual funds. Some policies also offer a fixed account with an interest rate set by the insurance provider.
You Are Interested in Tax Advantages
Variable life insurance policies may offer tax benefits, including tax deferred growth on investments. It is important to understand how your specific policy is taxed, since the tax treatment may not be beneficial in every situation.
Conclusion
Variable life insurance offers lifelong coverage with cash value tied to market performance, making it an option for those comfortable with investment risk. It provides flexibility and potential tax advantages but comes with higher costs and market exposure. Reviewing your goals, risk tolerance, and budget with a financial professional can help decide if this policy fits your financial strategy.
Maximize variable life insurance to enhance your financial strategy. Request a Free Life Insurance Quote
Footnotes & Sources
- This is merely a hypothetical example to help readers understand how cash value works.
- Variable Life Insurance. https://www.investor.gov/introduction-investing/investing-basics/investment-products/insurance-products/variable-life.
