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.

The Advisor Insight

Under the right circumstances, variable life insurance can receive favorable tax treatment and offer the chance to make money in the market and not pay taxes.

First, you have to qualify for a low premium. If the cost of insuring you is too high, it will significantly impede your cash growth.

Second, this product is treated legally as a security and rightfully so. Like any investment, you have to manage risk and reward, factor in expenses, stay on top of asset allocation and do everything else needed to ensure optimum performance. If you are not prepared to do this yourself, make sure you have an advisor who will.

You also need to understand how to work within existing tax laws. There's a right and wrong way to grow cash inside life insurance and take it out. Mistakes can be very costly.

Steve Kobrin
The firm of Steven H. Kobrin, LUTCF
Fair Lawn, NJ