Variable Life Insurance Policy

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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 Should cash value be withdrawn instead of borrowed, the policyholder faces tax implications on any realized earnings.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.