Loading the player...

What is 'Variable Life Insurance'

Variable life insurance is a permanent life insurance product with separate accounts comprised of various instruments and investment funds, such as stocks, bonds, equity funds, money market funds, and bond funds.

BREAKING DOWN 'Variable Life Insurance'

Because of investment risks, variable policies are considered securities contracts which have regulation under the federal securities laws.  Following the federal regulations, sales professionals must provide a prospectus of available investment products to potential buyers.   

Variable life insurance policies have specific tax benefits, such as the tax-deferred accumulation of earnings. Provided the policy remains in force, policyholders may access the cash value via a tax-free loan. However, unpaid loans, including principal and interest, reduce the death benefit. Also, loan interest may become taxable upon surrender of the policy. Additionally, interest or earnings included in partial and full surrenders of the policy are taxable at the time of distribution.

Variable Life Insurance Advantages

An attractive feature of the variable life insurance product is its flexibility regarding premium remittance and cash value accumulation. Premiums are not fixed, as with traditional whole life insurance or term insurance policies. Within limits, policyholders may adjust their premium payments based on their needs and investment goals. For example, if the policyholder remits a premium less than what is needed to sustain the policy, the accumulated cash value compensates for the difference. Although variable life insurance offers this flexibility, it is essential to understand that long-term remittance of reduced premiums can compromise the cash value and the overall status of the policy. Alternatively, policyholders may remit greater premium payments to increase their cash value and investment holdings. 

Unlike whole life insurance, the death benefit is linked to the performance of the separate account funds.  A positive aggregate performance could offer increased financial protection to the beneficiary upon the death of the insured. In addition to the policy's flexibility, the potential for significant investment earnings is another attractive feature. Many policies offer a wide array of investment options ranging from a conservative approach to an aggressive strategy, to suit the needs of most investors.

Variable Life Insurance Disadvantages

Compared to other life insurance policies, variable life insurance is typically more expensive. Premiums paid help cover administrative fees and the management of the plan's investments. The policyholder may need to increase payments to keep the policy active or to maintain a specific death benefit according to the performance of investment products and the premiums remitted.

As a proactive measure, some policyholders submit premiums exceeding the cost of the insurance policy to ensure the guarantees of their policies. Additionally, the policyholder solely assumes all investment risks. The insurer offers no guarantees of performance nor protects against investment losses. The policyholder must exercise due diligence by remaining educated about investments and attentive to the separate account performance. 

Like most life insurance policies, individuals are required to undergo full medical underwriting to obtain a variable life insurance policy.  Those people with compromised health or those who have other unfavorable underwriting factors may not qualify for coverage or may realize higher premiums.

RELATED TERMS
  1. Adjustable Life Insurance

    Adjustable life insurance is a term and whole life hybrid insurance ...
  2. Term Life Insurance

    Term life insurance, also known as pure life insurance, is life ...
  3. Variable Universal Life Insurance ...

    Variable universal life insurance (VUL) is a permanent life insurance ...
  4. Needs Approach

    Needs approach is a method of calculating how much life insurance ...
  5. Variable Death Benefit

    Variable death benefit refers to the amount paid out at death ...
  6. Guaranteed Issue Life Insurance ...

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

    Life Insurance: Variable Vs. Variable Universal

    Do you know why you might need one policy versus the other? Read on to find out the difference between Variable and Variable Universal life insurance.
  3. Insurance

    Life Insurance: Foundation to a Solid Portfolio

    Life insurance should be a foundation of an overall financial portfolio. Here's why.
  4. Financial Advisor

    Getting Life Insurance in Your 20s Pays Off

    Find out how Americans in their 20s can benefit from a well-thought-out life insurance policy, especially if they are able to build cash value for retirement.
  5. Insurance

    6 Ways to Capture the Cash Value in Life Insurance

    Here's how to make the cash value of your life insurance policy benefit you or your beneficiaries instead of the insurance company.
  6. Financial Advisor

    Buying a Life Insurance Policy? Read This First

    Knowing who needs life insurance, how it works and the different types of insurance can help consumers make informed decisions about this product.
  7. Insurance

    Choosing Between Whole and Term Life Insurance

    For most people, term life insurance is more suitable than whole life insurance. Here's why.
  8. Financial Advisor

    Pros and Cons of Indexed Universal Life Insurance

    Indexed universal life insurance has its pros and cons. Here's what you need to consider before purchasing a policy.
Hot Definitions
  1. Investment Advisor

    An investment advisor is any person or group that makes investment recommendations or conducts securities analysis in return ...
  2. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  3. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  4. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  5. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  6. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
Trading Center