Variable Life Insurance: Understanding the Pros and Cons


quick Facts

  • The monetary values ​​of variable life insurance policies can grow at faster rates than any other permanent policy
  • Variable rates life insurance is more expensive than other types of whole life or life insurance
  • Your eligibility for variable life insurance depends on your age, lifestyle, and medical history

What is a variable life insurance policy? Some describe it as a kind of Permanent life insuranceVariable life insurance is best defined as one of the riskiest types of life insurance you can buy.

Like all whole life insurance policies, variable life insurance (VLI) builds a cash value that often meets or exceeds the death benefit amount by the time the policy becomes due. However, policyholders can invest VLI in multiple markets of their choice, potentially earning significantly more than a standard fixed interest rate.

The danger is that earnings are entirely dependent on market performance. So protect your investment by understanding the pros and cons of variable life insurance.

Use this guide to comparing variable whole life to other types of life insurance, including variable universal life insurance, to see if this policy fits your wallet.

How does variable life insurance work?

What is variable life insurance? Variable life insurance works like whole life insurance in the following ways:

  • It guarantees death benefits throughout the life of the policyholder.
  • It comes with fixed monthly rates that will not increase with age.
  • It builds up the cash value that you can borrow against or use to pay future insurance premiums.

However, the unique definition of variable life insurance is centered around its monetary value and market investment opportunities.

A variable-only insurance policy allows you to invest cash value in different markets and sub-accounts. Policyholders can choose which accounts they want to invest in, but profits depend on market performance.

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What are the pros and cons of a variable life insurance policy?

The biggest advantage of variable life insurance is the investment potential. The cash values ​​of variable life insurance policies can grow faster than any other permanent policy, and you get to choose where to invest.

Compare the pros and cons of VLI below to better understand how this policy works.

Variable life insurance is not for everyone and can cost policyholders more than beneficiaries receive if you are not familiar with the market. We recommend speaking to a financial advisor before purchasing a policy.

Advantages of variable life insurance

Besides diversifying your investments, you can also borrow for cash value or use VLI sub-accounts as collateral for the loan. These withdrawals and loans are tax-deferred, providing you with tax-free income after retirement.

The different types of variable life insurance come with many other benefits, including:

  • Flexible die benefits. Unlike other whole life insurance policies, the death benefits of a variable insurance policy can increase based on market performance and investment strategy.
  • Flexible installments. Policyholders can adjust annuity life insurance rates based on personal needs and financial goals. The cash value of the policy will cover the difference if you pay less, while paying more may increase the cash value.

franchise with Flexible variable life insurance premiums is that your rates never change due to old age or declining health. However, as the policyholder, you can adjust your monthly or annual payments based on your investment goals.

The downside is that you risk moving below the minimum amount if you continue to pay less than your annual rates. For example, some life insurance companies require a minimum death benefit to keep the policy active, and you risk falling out of coverage.

Disadvantages of variable life insurance

Death benefits and the monetary value of a VLI depend on market fluctuations, so insurers usually require that death benefits be maintained at a minimum level.

Most policyholders pay above their monthly rates to cover the policy and the associated fees. Otherwise, payments and fees are subtracted from the investment gain. The disadvantage is that variable life insurance rates are already more expensive than average.

Market performance is volatile and a life insurance company cannot guarantee investments. Therefore, you risk losing money if your investments don’t work out the way you planned.

Besides the higher rates and increased risks, VLI policies are more difficult to qualify for than long-term life policies or traditional whole life policies. You must undergo a full medical examination, and most insurance companies will not accept anyone with a standard or substandard rating. Learn more about Life insurance rating classes To see if you qualify.

Compare variable insurance products

Now that you understand more about variable life insurance, you can compare your findings to other life insurance products, including general term life and variable life.

Another crucial difference between all of these types of policies is the cost of coverage. Life insurance rates are the cheapest due to the lack of cash value and short term coverage. However, whole life insurance and comprehensive life insurance still cost less than VLI.

That’s why shopping with several companies and comparing life insurance rates for different policies is important to finding coverage at a price that works for you.

Use the comparison tool below to get free quotes, or scroll down for more details on the differences between variable life insurance and other life insurance policies.

Difference between variable life insurance vs life insurance

A variable insurance policy is permanent life insurance, so the coverage lasts your entire life. Life insurance only lasts for a specified period, usually between 15 and 30 years.

For life covers your family’s short-term debts, such as mortgages or business loans, if you suddenly die or become unable to work. Life changing, on the other hand, complements your long-term investment goals while still providing death benefits to your loved ones.

These investment opportunities are another important difference between variable and life insurance. There is no such thing as variable term life insurance because fixed term products do not have an investment component – only whole life insurance can build cash value.

Difference between variable life insurance vs whole life insurance

Whole life and variable life build tax-deferred cash value. Both policies provide coverage for life and have fixed rates that won’t increase as you age. However, only variable whole lives allow you to invest cash value in securities.

Because of this, you can make more money with a changing life policy – the disadvantage is the risk. The cash value of traditional whole life insurance may only earn you a low, fixed rate of interest, but that interest is guaranteed. Earnings depend on variable insurance on the market.

Difference between life changing vs life changing global policies

What is variable universal life insurance? Variable universal life (VUL) policies are a type of flexible life insurance discussed in the previous section.

Policyholders can also use the VUL cash value and death benefit to cover premium payments later in life. However, doing so could exhaust the policy and leave nothing behind for the beneficiaries.

The biggest difference between variable life and a VUL is the guarantee of death benefits. The monthly rates for a variable term life insurance policy are much higher because the coverage guarantees a minimum death benefit regardless of market performance.

compare Comprehensive insurance vs life insurance Learn more about the pros and cons of comprehensive variable life insurance.

Understand the pros and cons of variable life insurance

Variable life insurance is a type of life insurance policy that offers unique and profitable investment opportunities. Policyholders can invest the cash value component of the VLI in any market or account they choose, but gains depend on market performance.

VLI is not a very popular policy because of this high level of risk. Instead, life insurance is the most common type of life insurance that people buy, but you may need a lifetime coverage that builds on your investment portfolio.

Consider your needs and what each policy offers before purchasing variable life insurance.

Frequently Asked Questions

How does a variable life insurance policy work?

Variable life insurance works like whole life insurance by guaranteeing death benefits for the entire life of the policyholder at fixed annual rates that do not increase with age. VLI also builds cash value, which you can borrow against later or use to pay future installments.

The big difference between variable life and whole life is that policyholders can invest this cash value in the markets of their choice rather than simply receiving a low fixed interest rate.

What are the risks of variable life insurance?

Since VLI investments are entirely dependent on market performance, you risk losing money if your strategy does not work as planned. However, the potential rewards outweigh the risks, making variable life insurance a viable option for someone who understands the market and wants increased death benefits.

Can you withdraw money from a variable life insurance policy?

Yes, borrowing against a VLI or using it as collateral for a loan is a profitable way to secure income in your later years. Money borrowed from a variable life insurance policy is not taxable, but you will have to pay a fee.

How is variable life insurance closer to a guarantee than an insurance policy?

Variable life insurance is regulated by the Securities and Exchange Commission (SEC) because it has multiple, separate investment accounts rather than a cash value component like other permanent policies.

The Securities and Exchange Commission requires life insurance agents to provide a prospectus to policyholders interested in purchasing variable life insurance. It lists the details of each investment offer so you can make an informed decision. Failure to show the prospectus or knowingly providing misleading information may result in insurance company fines.

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Editorial Tips: We are a free online resource for anyone interested in learning more about life insurance. Our goal is to be an objective third party source for all things life insurance. We update our website regularly, and all content is reviewed by life insurance experts.

Rachel Brennan has been in the insurance industry since 2006 when she started working as a licensed insurance representative for 21st Century Insurance, during which time she held her property and casualty license in all 50 states. Several years later, she expanded her expertise in the insurance field, earning a license in health insurance and AD&D insurance as well. I worked for a small health in…

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Rachel Brennan
Licensed insurance agent
Rachel Brennan

Benjamin Carr was a licensed insurance agent in Georgia with two years of experience in life, health and property and casualty insurance. He has worked with State Farm and other risk management firms. He is also a strategy writer and editor with a background in branding, marketing, and quality assurance. He’s been in military newsrooms – literally on the front lines of journalism.

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Benji Carr

Previously Licensed Life Insurance Agent

Benji Carr



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