Variable Life vs. Variable Universal: What's the Difference?

Variable Life Insurance vs. Variable Universal Life Insurance: An Overview

For investors that love to watch the market, variable life insurance products are interesting. These products allow for a portion of the premium to be allocated to the insurance company's investment fund, allowing tax-free profits to be generated for beneficiaries.

Variable universal life insurance products feature the same investment opportunity plus more. These whole life policies allow for the investment of its cash value, as well as flexible premiums and a flexible death benefit.

Investors looking for life insurance coverage have several options, from term to whole life, and many things in between. Life changes mean that insurance needs also change, where it’s important to re-evaluate your financial plan after major life events, such as marriage or a home purchase.

Key Takeaways

  • A variable life insurance policy allows most of the premiums to be invested in an investment account, combining the benefits of a variable policy with a whole life policy.
  • One of the key risks of both types of policies is the fluctuation in cash value and death benefits due to the performance of investments.
  • A key benefit is that the cash values of both are allowed to grow on a tax-deferred basis.
  • Both are governed by securities law and require a prospectus.
  • Variable universal life insurance policies have two death benefit options: fixed and variable.
Variable Life vs. Variable Universal

Investopedia / Sabrina Jiang

Variable Life Insurance

In a variable life insurance policy, the bulk of the premium is invested in one or more separate investment accounts, with the opportunity to select from a wide range of investment options—fixed-income, stocks, mutual funds, bonds, and money market funds. What's more, the interest earned on the accounts increases with the account's cash value. Risk tolerance and investment objectives determine the amount of risk to be undertaken.

Normally, insurers have their own professional investment managers supervising the investments, and as a result, policyholders will be charge management fees. Therefore, the overall asset performance of the investment is generally the main topic of concern.

Advantages and Disadvantages

Because of the available investment options, variable life insurance has the potential of accumulating more cash than traditional whole life insurance. On the flip side, it has the potential to lose more, as well.

Policyholders of variable life insurance policies can typically choose from one of two death benefit options. The level death benefit option provides a set face value, which is stated on the policy document. This death benefit does not change throughout the life of the policy.

The second option is the face amount with cash value. In other words, the death benefit equals the face amount stated on the policy and the accumulated cash value. This ensures that what you've earned will be paid. However, it comes with a cost as it is more expensive than the face amount death benefit option.

  • Multiple investment options

  • Options for death benefits

  • Greater accumulation of cash value

  • More expensive than standard life insurance

  • Assumed investment risks

  • Investment fund management fees

Variable Universal Life (VUL) Insurance

Variable universal life (VUL) insurance, as the name suggests, is a policy that combines variable and universal life insurance (i.e., flexible variable life insurance). This is one of the more popular insurance policies because it gives its policyholders the option to invest, as well as alter the insurance coverage with ease.

As with universal life insurance, a policyholder has the ability to decide the amount and frequency of premium payments, although within specific limits. You may also make a lump sum payment within certain limits or use your accrued cash value toward premium payments.

Advantages and Disadvantages

As long as the minimum premium is paid to cover the cost of insurance, the death benefit will remain the same. However, the policy owner may be able to stop paying premiums altogether if the policy has sufficient cash value to keep the policy in force, allowing them to save what would have been paid as premiums.

For policies with healthy cash values, policy owners can withdraw or borrow against it. However, these events could reduce the death benefit and trigger a taxable event. Furthermore, loans must be repaid with interest. The policyholder is essentially borrowing their own money and paying the insurer to do so.

For the investor, VULs offer a separate account, which includes funds tied to the market, and a fixed account, where money invested earns a fixed rate of interest. With the separate account funds, the policyholder assumes the market risk, including substantial returns or substantial losses.

Because VULs offer a myriad of features and benefits, they typically cost more than a standard whole life policy. On average, a VUL is approximately 20% more expensive than a standard universal life policy.

  • Flexible death benefit and premiums

  • Available cash value

  • Variety of investment options

  • Risky investments

  • Accumulating loan interest

  • More expensive than standard policies

Key Differences


A variable life policy is quite risky because the cash value and death benefits can fluctuate according to the investment portfolio's performance. Therefore, if the underlying investments perform well, the death benefit and cash value may increase accordingly. If the investments perform worse than expected, the death benefit and cash value may decrease.

A variable life insurance policy does offer a guaranteed death benefit, which will not fall below a minimum amount even if the invested assets devalue significantly. This guaranteed death benefit requires higher premiums, however. The funding of the death benefit will be done by applying an assumed rate of interest, usually around 4%. If the fund performance exceeds or declines beyond this assumed rate of interest, the death benefit will go up or down accordingly.

Insurance companies do not guarantee rates of return for investment funds.

VUL policies allow the policyholder to increase and decrease the death benefit as they please. An increase in the death benefit calls for evidence that of good health, while a decrease in the death benefit may have surrender charges. There are two options of death benefit: fixed death benefit and variable death benefit. The variable death benefit is equal to the cash value at the time of death, plus the face value of the insurance.

Unlike universal life insurance, this policy offers the freedom to invest in a preferred investment portfolio. The policyholder can be a conservative or aggressive investor. The investment options vary among insurers, but almost all VUL policies consist of investment in stocks, bonds, money market securities, mutual funds, and even the most conservative option of guaranteed fixed interest. Thus, there is a possibility that the underlying assets provide negative returns.


As with permanent life policies, the cash value of a variable life insurance policy grows on a tax-deferred basis. Many insurers allow premium payments to be paid via the accumulated cash value, which means a reduction in premium payment. However, if the investments perform poorly, less money will be accessible from the cash value, and more money will have to be paid to keep the policy in force.

Meanwhile, because it is a permanent life policy, VUL provides tax-deferred cash value and loan withdrawals, within certain limits, against the cash value. Normally, policy loans are tax-free, but you need to confirm this with your insurance advisor as the tax implications may differ from one state to another.

Governing Bodies

Because a variable life policy deals with security investment risks, it is considered a securities contract and is governed by prevailing securities law. It is obligatory to read the prospectus carefully before investing in a variable life insurance policy.

Like variable insurance, VUL policies must be sold with a prospectus due to their inherent securities risk and are governed by securities laws. You must carefully read the prospectus before buying a VUL policy.

The Bottom Line

An individual’s insurance coverage needs may change over time, and variable life insurance products do a good job of factoring in these potential changes. Variable life, as well as VUL policies, form a perfect hedge against inflation. For some, control over investments through variable life offers a desired edge, while others may prefer VUL for its high level of flexibility and the policyholder's open-mindedness toward market fluctuations.

Variable Universal Life Insurance FAQs

What Is the Difference Between Variable Annuity and Variable Life Insurance?

Variable annuities are retirement accounts in which the owner's contributions can be invested into funds. An annuity is designed to ultimately fund retirement with a stream of income payments to the annuity owner; its cash value accumulates tax deferred until distributed. However, during the accumulation phase, the owner can withdraw a portion or all of its value less any applicable charges.

A variable life insurance policy functions similarly in that the policyholder can invest the cash value in investment funds, and the owner can access the cash value. However, it is not designed to generate a stream of income. The policy's full value—face amount and cash value—is not available to the policyholder.

What Is the Difference Between Whole Life Insurance and Variable Life Insurance?

Whole life insurance and variable life insurance are permanent life insurance policies. Whole life insurance has level premiums and death benefits. In addition, the account can accumulate a cash value but cannot be invested. Similarly, variable life insurance allows for the accumulation of cash value. However, the cash value can be invested in funds in a separate account, and the death benefits and premiums are flexible.

What Is the Difference Between Term and Variable Insurance?

Term life insurance is not permanent life insurance. It does not build cash value and the death benefit is only guaranteed for a specific term. A variable life insurance policy is a permanent policy, guaranteeing a death benefit for the life of the insured, and it builds cash value.

Article Sources
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  1. Vittana. "11 Variable Universal Life Insurance Pros and Cons." Accessed June 27, 2021.