Variable life insurance (VLI) is a form of permanent life insurance. A VLI policy is structured to financially benefit you while you’re alive and your beneficiaries after your death by providing more than just a death benefit. The cash value of a variable life insurance policy can be invested, offering the potential for greater returns than other types of permanent life insurance.
Variable life insurance (VLI) is a form of permanent life insurance, which as the name implies is designed to last for the insured person’s lifetime. Like other forms of permanent life coverage, VLI policies carry an investment component known as its cash value as well as a guaranteed death benefit in most cases. So as long as you pay your premiums and follow the policy’s rules, coverage will remain in force.
Variable life insurance is an option for individuals who don’t mind risk. The cash value in a VLI policy can be invested, but returns aren’t guaranteed. When the market is doing well, your policy’s cash value may be, too. If the market is bearish your VLI policy could lose value, although many policies have a floor to protect against negative returns. Depending on the company and policy language, your gains may be capped at a certain percentage with any excess return forfeited to the insurer.
Variable life insurance premiums are placed in an account for investment purposes, and you as the policyholder can choose how to allocate that cash value in a series of investment vehicles or sub-accounts like mutual funds. Depending on the policy and insurer, you may be able to invest a portion of your cash value in a fixed-rate sub-account as well.
As with any investment, risk is involved. If the market does poorly, your policy’s cash value could suffer. But if it does well, so will the cash value of your policy, potentially giving you additional funds you can access by borrowing or withdrawing or by redirecting into the policy’s death benefit. Note that doing so can adversely affect your death benefit or subject you to taxes or fees.
The cash value of a variable life insurance policy grows on a tax-deferred basis. You won’t have to pay tax on it unless you withdraw funds (which is different than borrowing from the cash value). If you choose to take a loan against your life insurance policy, you will not be taxed on the amount you borrow. In addition, the IRS does not count the death benefit as gross income, saving your beneficiaries from having to pay taxes on the amount they receive.
If you’re still weighing whether a variable life insurance policy is worth it, consider the following pros and cons.
Both term and VLI have fixed premiums. Term life insurance premiums are on average less than permanent life products like VLI because term life coverage lacks an investment component that builds cash value over time. What’s more, a term life death benefit is guaranteed only while the policy term is in effect. Depending on the insurer and policy, terms can range from one to 30 years or longer. With VLI and other forms of permanent life insurance, coverage lasts for the insured person’s lifetime.
Both variable life insurance and whole life insurance are forms of permanent coverage. Premiums are level and neither policy can be canceled due to changes in your health. Both types of life insurance also have a death benefit and accumulate cash value on a tax-deferred basis over time.
The biggest difference between the two is the growth opportunity and level of risk. The cash value of a whole life policy earns a fixed, relatively low rate of interest similar to a savings account or money market, and the death benefit is guaranteed. A VLI policy has more flexibility, giving you the option to invest that cash value in securities such as mutual funds. However, it can also be more volatile, increasing or decreasing in cash value based on market performance, and you will be subject to fees associated with managing that investment component.
Despite similar names, variable life insurance (VLI) and variable universal life insurance (VUL) are different types of permanent life coverage. Both have a cash value account that can be invested. Depending on your needs, VUL may offer more flexibility than VLI. VUL policies allow you to adjust the premium amount the same way a regular universal life insurance policy does. Raising or lowering your premium will affect the death benefit amount, however. By contrast, VLI premiums are fixed and death benefits are guaranteed in most instances.
Best Life Insurance Companies of 2022
Head to our Best Life Insurance Companies of 2022 page, where you’ll find an overview about each company, why they’re highly rated, and the types of policies offered.
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