Loading the player...

What is a 'Variable Life Insurance Policy'

A variable life insurance policy is a form of permanent life insurance. Variable life insurance provides permanent protection to the beneficiary upon the death of the policyholder. This type of insurance is generally more expensive than term insurance because it allows the insured to allocate a portion of the premium dollars to a separate account comprised of various instruments and investment funds within the insurance company's portfolio, such as stocks, bonds, equity funds, money market funds and bond funds.

BREAKING DOWN 'Variable Life Insurance Policy'

Because of investment risks, variable policies are considered securities contracts and are regulated under the federal securities laws; therefore, they must be sold via a prospectus. As a securities product, fund performance may lead to declining cash value or death benefit over time.

Variable life insurance policies have certain tax benefits made available to policyholders, such as the ability to utilize cash value on a tax-benefited basis. As long as premiums are paid and the policy remains in force, policyholders can access the cash value through a tax-free loan against the policy. Should cash value be withdrawn instead of borrowed, the policyholder faces tax implications on any realized earnings. Any loans taken out that are not repaid have the potential to decrease the death benefit paid to beneficiaries at the time the insured passes away.

Variable Life Insurance Flexibility

One of the aspects of variable life insurance that makes it stand out among other permanent life insurance policies is the flexibility it provides policyholders in terms of premiums paid and cash value accumulation. Premiums paid to a variable life insurance policy are not fixed as they are with traditional whole life insurance or term insurance. Instead, they can be shifted up or down over time, within certain limits, based on the insured's needs. For example, an insured with a variable life insurance policy may decide to reduce monthly premium payments from $100 to $50 because a major expense may have impeded cash flow for a period of time. The cash value within the policy can be used to make up the shortage in premium payments during the time lower premium payments are made. When cash flow returns to a comfortable level, the insured has the option to increase premiums back to the initial $100 per month.

Downsides of Variable Life Insurance

Unlike fixed life insurance products, variable life insurance may require policyholders to add premiums over time to ensure the death benefit remains guaranteed to a certain age. Paying more than the minimum cost of insurance for a variable life insurance policy is one method to ensure guarantees remain intact. Additionally, investment risks within the cash value of a variable life insurance policy fall completely on the policyholder, not the insurance company. As such, there are no guarantees as to how well the cash value may perform over time, making it difficult to plan for using accumulated earnings in the future. Like most life insurance policies, individuals are required to undergo full medical underwriting to obtain a variable life insurance policy.

RELATED TERMS
  1. Life Insurance

    A protection against the loss of income that would result if ...
  2. Variable Universal Life Insurance ...

    A form of cash-value life insurance that offers both a death ...
  3. Whole Life Insurance Policy

    A life insurance contract with level premiums that has both an ...
  4. Equity-Indexed Universal Life Insurance

    A permanent life insurance policy that allows policyholders to ...
  5. Term Life Insurance

    A policy with a set duration limit on the coverage period. Once ...
  6. Key Person Insurance

    A life insurance policy that a company purchases on a key executive's ...
Related Articles
  1. Insurance

    Understanding Taxes on Life Insurance Premiums

    Learn about the tax implications of life insurance premiums, including when they might be taxable and whether they are tax deductible.
  2. Insurance

    Whole or Term Life Insurance: Which Is Better?

    Learn the difference between term life insurance and whole life insurance. Understand when it is beneficial to buy each type of life insurance.
  3. 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.
  4. Insurance

    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.
  5. 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.
  6. Retirement

    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. Insurance

    Tips for Helping Clients with Life Insurance Needs

    Life insurance needs will likely change over the client’s lifetime and again financial advisers can provide an objective sounding board.
  8. Financial Advisor

    Why the Wealthy Should Buy Lots of Life Insurance

    Wealthy clients have an enviable problem — managing, preserving and growing wealth. Properly structured life insurance can help with these goals.
Hot Definitions
  1. Trumpcare

    The American Health Care Act, also known as Trumpcare and Ryancare, is the Republican proposal to replace Obamacare.
  2. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
  3. Portable Alpha

    A strategy in which portfolio managers separate alpha from beta by investing in securities that differ from the market index ...
  4. Run Rate

    1. How the financial performance of a company would look if you were to extrapolate current results out over a certain period ...
  5. Hard Fork

    A hard fork (or sometimes hardfork) is a radical change to the protocol that makes previously invalid blocks/transactions ...
  6. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
Trading Center