What is variable life insurance?

If you’re shopping for life insurance, you may have heard of variable life insurance. But what exactly is it? And is it worth the cost?

Variable life insurance, also known as variable appreciable life insurance, is a type of permanent life insurance that includes a cash value component that may grow over the life of your policy. A permanent life insurance policy is one that offers coverage for your whole life, no matter how long you live, as long as premiums are paid, unlike inexpensive term policies that are designed to cover you for a fixed period of time.

The cash value of variable life insurance is sometimes promoted as an investment for your future. Yet, for most people, the fees and risks associated with variable life insurance make term life insurance a better option.

Here’s what you need to know.

What is variable life insurance?

Variable life insurance, as noted above, is a type of permanent insurance. As long as your premiums are paid, you’ll have life insurance coverage. Even if you don’t die until you’re 104, warm in your bed.

But the other main draw of permanent life insurance is typically the cash value that can grow as you pay premiums. With variable life insurance, there is potential for greater cash value growth because it is invested in accounts that are similar to mutual funds – as opposed to accounts with guaranteed growth or interest that other types of permanent life insurance policies offer.

If this makes variable life insurance seem like the obvious choice, remember that nothing is free.

Potentially higher cash returns in a variable life investment come with the chance that the cash value can actually decline, and there are no guaranteed returns. Also, there can be significant fees associated with the cash account and policy, and premium payments are much higher than comparable term life policies.

Before choosing variable life insurance, make sure the potential benefits outweigh those costs and risks.

How does variable life insurance work?

Variable life insurance has three important components: premiums, death benefit, and cash value.

The premium is what you pay for your policy. A portion of your payment goes to your life insurance coverage, a portion to fees and broker commissions, and the remainder invested in your cash value. Premium payments can fluctuate based on your account’s cash value. You might be able to use some of the cash value to reduce your out-of-pocket expense for premiums, or you might be in the position of needing to increase your premium payments in order to keep the policy afloat if your cash value falls too low.

The death benefit is your life insurance coverage and how much your beneficiary will receive when you pass. It’s also known as the face value of your policy. As with all life insurance, this benefit is generally income-tax free to the beneficiary.

The cash value is an account associated with your life insurance policy. The portion of your premiums added into this account can be invested in a range of stock, bond and money market funds, depending on the policy provider.

As your cash value grows over time, it may begin to “push up” the death benefit higher than the initial amount. That’s because the death benefit always has to be a certain percentage higher than the cash value. As with any permanent life insurance policy, your beneficiaries receive only the death benefit when you pass — not the death benefit plus the cash value.

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Pros and cons of variable life insurance

Variable life insurance is a nuanced type of life insurance that combines permanent life insurance coverage with an investment component.

To some, the benefits seem attractive.

You receive life insurance coverage for your entire life. Whether you pass at 49 or 99, if your premiums are paid up, your heirs will receive a death benefit.
Cash value growth is tax-deferred. You don’t have to pay taxes on the cash value growth unless you withdraw funds from your policy — and then only if your withdrawals exceed the amount you’ve paid in premiums.
Greater potential return than whole life. Despite not having the guaranteed investment returns of other types of permanent insurance, variable life insurance does have a greater range of investment options, such as subaccounts similar to mutual funds, that have the potential to increase long-term returns.

Yet, the downsides of variable life insurance aren’t to be ignored.

Premiums are expensive. Variable life insurance premiums can be cheaper than other types of permanent life insurance, but they will always be significantly more expensive than the initial premiums for a term life policy.
Your premium payments aren’t fixed. If your cash value grows, you can choose to divert some of your cash value to cover premiums. But if your cash value falls too far — which happened to many variable life insurance holders in 2008 — the cost to sustain your death benefit may increase significantly. If you can’t pay the higher premiums and your cash value isn’t sufficient to cover the difference, your policy could lapse and your coverage would be lost.
Fees and expenses are considerable and can reduce cash value returns. Variable life insurance has mortality and expense fees, administrative fees), investment management fees, and more. These costs can be a drag on cash value growth.

For many people, the downsides of variable life insurance outweigh the benefits. They can receive quality life insurance coverage with a term policy at a lower cost and invest their savings independently with fewer fees or restrictions on accessing their funds.

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Term life insurance as an alternative to variable life insurance

Life insurance is meant to protect your loved ones when they need it most – giving you coverage for the years when your children are young, you still have liabilities such as a mortgage, or are early in saving for college expenses or retirement. Term life can protect you during those important years, without elevated costs to sustain your coverage when your needs decline.

While a $500,000 variable life insurance policy for a 30-year-old male in excellent health might cost several hundred dollars a month in premiums, a 20-year term life policy from Haven Life could cost as little as $20.19. Get your term life insurance quote here. Then invest those savings for your future, without the fees and expenses, and build a healthy nest egg for yourself and your family.

Chelsea Brennan is the founder of Smart Money Mamas, a personal finance blog that focuses on family finance, investing, and reducing money stress. Chelsea is an ex-hedge fund investor whose work has appeared in a wide array of publications, including Forbes, Business Insider, and more.