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 Should cash value be withdrawn instead of borrowed, the policyholder faces tax implications on any realized earnings.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

    A type of variable life insurance policy that covers two individuals ...
  6. Guaranteed Issue Life Insurance ...

    A type of financial-protection policy that provides cash to a ...
Related Articles
  1. Financial Advisor

    Permanent Life Policies: Whole Vs. Universal

    If you're looking for life-long security, choosing between these two is the key.
  2. Financial Advisor

    Advising FAs: Explaining Life Insurance to a Client

    Life insurance was initially designed to protect the income of families, particularly young families in the wealth accumulation phase, in the event of the head of household's death.
  3. 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.
  4. Financial Advisor

    Variable Vs. Variable Universal Life Insurance

    Do you know why you might need one policy versus the other? Read on to find out.
  5. Personal Finance

    The Best Life Insurance for Military Families

    Two of the most common types of life insurance are term and whole life. Here's why the latter isn't a good idea for most military families.
  6. Retirement

    How Whole Life Insurance Works

    Whole life insurance combines insurance and an investment component for policyholders.
  7. Insurance

    Term Life Insurance: Everything You Need to Know

    Term life insurance is an affordable way to financially protect your loved ones after your death. Here's what you need to know before purchasing a policy.
  8. 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.
  9. 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.
Hot Definitions
  1. Treasury Bill - T-Bill

    A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations ...
  2. Index

    A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is a hypothetical ...
  3. Return on Market Value of Equity - ROME

    Return on market value of equity (ROME) is a comparative measure typically used by analysts to identify companies that generate ...
  4. Majority Shareholder

    A person or entity that owns more than 50% of a company's outstanding shares. The majority shareholder is often the founder ...
  5. Competitive Advantage

    An advantage that a firm has over its competitors, allowing it to generate greater sales or margins and/or retain more customers ...
  6. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities ...
Trading Center