Variable life insurance is a whole life insurance that allows the policy holder to allocate a portion of premiums to a separate investment fund from the insurer’s portfolio.

Variable life insurance is high-risk and high-reward. If you don’t have money to burn over the long term, you probably don’t want variable life insurance.

What is Variable Life Insurance?

Variable life insurance is the riskiest of the basic life insurance types. It allows you to vary the way premiums, death benefits, and investments are handled like universal policies, but also allows the policy holder to manage their own investments within the insurer’s portfolio. Due to this flexibility a policy holder could end up getting less cash value and less death benefits from this policy.

Pros and Cons of Variable Life Insurance

  • Like other life insurance types which include an investment fund, the fund is tax-advantaged. This means tax isn’t owed until the policy is paid out.
  • Unlike other tax-advantaged savings accounts like HSAs and 401ks a person cannot withdraw from “cash value” during their lifetime.
  • Unlike whole life insurance, there are a number of fees associated with variable life insurance. This adds to the volatility of the insurance. If your investments go south, you may have to drop the policy due to it becoming unaffordable over time.

How Variable Life Insurance Premiums Work

Variable life insurance is a permanent life policy that uses premium dollars in three ways:

  1. A portion of the premium goes toward death benefits.
  2. A portion of the premium goes toward the insurer’s investment fund (in some variable life insurance policies, others just use the self-managed fund).
  3. A portion of the premium goes toward a second investment fund. This second investment fund allows the policy holder to select different investments from the insurer’s portfolio (such as stocks, bonds, equity funds, money market funds, and bond funds).

Since the policy holder takes on investment risks by essentially managing their own investment fund, variable life insurance policies are considered securities contracts and are regulated by the SEC under the federal securities laws.