A:

Variable life insurance is a permanent life insurance policy with an investment component. The policy has a cash value account, which is invested in a number of sub-accounts available in the policy. A sub-account acts similar to a mutual fund, except it's only available within a variable life insurance policy. A typical variable life policy will have several sub-accounts to choose from, with some offering upwards of 50 different options.

The cash value account has the potential to grow as the underlying investments in the policy's sub-accounts grow - at the same time, as the underlying investments drop, so may the cash value.

The appeal to variable life insurance lies in the investment element available in the policy and the favorable tax treatment of the policy's cash value growth. Annual growth of the cash value account is not taxable as ordinary income. Furthermore, these values can be accessed in later years and, when done properly through loans using the account as collateral, instead of direct withdrawals, they may be received free of any income taxation.

Similar to mutual funds and other types of investments, a variable life insurance policy must be presented with a prospectus detailing all policy charges, fees and sub-account expenses.

To learn more, be sure to read our related article, Variable Vs. Variable Universal Life Insurance.

This question was answered by Barry Higgins.

RELATED FAQS
  1. What is the difference between the death benefit and cash value of an insurance policy?

    Understand the difference between the various components of a life insurance policy including the death benefit and a policy's ... Read Answer >>
  2. How does taxation on life insurance for a qualified retirement plan work?

    Purchase life insurance in your qualified retirement plan using pre-tax dollars. Be aware of other ways that life insurance ... Read Answer >>
  3. Are variable annuities a good retirement investment?

    Discover the basics of variable annuities, the positive and negative aspects associated with them, and who is best suited ... Read Answer >>
  4. What variables are most important when making a prediction through sensitivity analysis?

    Explore sensitivity analysis and how this method considers different variables to determine a course of action based on statistical ... Read Answer >>
  5. How do I determine the face value of a life insurance policy?

    Read about how to determined the face value for any life insurance policy, and see what circumstances can trigger a change ... Read Answer >>
  6. What are some examples of when insurance bundling is a bad idea?

    Learn about situations where insurance bundling may not be a favorable option. Bundling insurance is often a good idea, but ... Read Answer >>
Related Articles
  1. Insurance

    Understanding Different Types of Life Insurance

    Understand the various types of life insurance, how each can be used in personal or business financial planning, and for whom they are best-suited.
  2. Insurance

    How Cash Value Builds In A Life Insurance Policy

    If you have permanent life insurance, more of your insurance premium goes to cash value in the early years of your policy: a step-by-step guide.
  3. Retirement

    Variable Vs. Variable Universal Life Insurance

    Do you know why you might need one policy versus the other? Read on to find out.
  4. Retirement

    5 Mistakes That Can Ruin Your Life (Insurance)

    Don't let these simple errors leave you unprotected. Read on to learn more.
  5. Insurance

    Should You Buy Variable Universal Life Insurance ?

    A guide to when it is best to buy universal life insurance.
  6. Insurance

    Beware the Sneaky Math of Universal Life Insurance

    Universal life insurance's cash value can be a cash cow – if there's any left. Read on to see if it'll work as an income source after you've retired.
  7. Options & Futures

    Permanent Life Policies: Whole Vs. Universal

    If you're looking for life-long security, choosing between these two is the key.
  8. Insurance

    Which Life Insurance is Right For You?

    Consumers have choices when it comes to life insurance. Knowing your future needs for cash or retirement can make the difference in what you select.
  9. Insurance

    3 Reasons to Avoid Term Insurance

    Find out the reasons why term life insurance may not be for everybody, and why you may want to avoid it in favor of a permanent life insurance policy.
  10. Trading Strategies

    How Good An Investment Is Life Insurance?

    Compared to other options, does it ever make sense to include cash-value life insurance in your investment portfolio? A look at the pros and cons.
RELATED TERMS
  1. Subaccount Charge

    Fees charged for the management of an investment fund.
  2. Equity-Indexed Universal Life Insurance

    A permanent life insurance policy that allows policyholders to ...
  3. Universal Life Insurance

    A type of flexible permanent life insurance offering the low-cost ...
  4. Variable Death Benefit

    The amount paid to a decedent's beneficiary that is dependent ...
  5. Term Life Insurance

    A policy with a set duration limit on the coverage period. Once ...
  6. Adjustable Life Insurance

    A type of life insurance that combines features of term and whole ...
Hot Definitions
  1. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  2. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  4. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  5. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  6. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
Trading Center