What Is Variable Life Insurance?

Rebecca Parson
Rebecca Parson

Rebecca Parson


Rebecca Parson is a financial and tech writer with 10 years of experience writing about topics such as life insurance, commodities investing, and the SaaS industry. She has a master’s degree from Johns Hopkins University and a bachelor’s degree from the University of Mary Washington. Her writing has appeared at money.com, sacbee.com, cart.com, herodevs.com, blanchardgold.com, and more.

Brian OConnel
Brian OConnel

Brian O'Connel


Brian O’Connell has been a contributing writer for U.S News & World Report since 2016. A former Wall Street bond trader and the author of two best-selling books; “The 401k Millionaire” and “CNBC’s Creating Wealth”, he has 20 years experience covering business news and trends, particularly in the business and financial sectors. He believes education is the best gift a financial consumer can receive – and brings that philosophy to every story he writes. His byline has appeared in dozens of top-tier national business publications, including CBS News, Bloomberg, Time, MSN Money, The Wall Street Journal, CNBC, TheStreet.com, Yahoo Finance, CBS Marketwatch, and many more.

By Rebecca Parson, Brian O'Connel
Author, Contributor, Life Insurance

Key Takeaways

  • Variable life insurance offers cash value that you can invest as you choose.
  • This is a more volatile type of life insurance policy than others.
  • You can sell your variable life insurance policy if you don’t need it anymore.

What Is Variable Life Insurance?

Variable life insurance is a type of permanent life insurance with an investment feature. It lets you build cash value, which is usually invested in mutual funds, and it has a fixed death benefit (the amount your beneficiaries receive when you die).

Because the policy’s investments can rise or fall with the market, the policy’s value can rise or fall, too. This means there’s no guarantee of how much your beneficiaries will get. That said, you can choose to allocate part of your premium to a fixed account with a guaranteed rate of return.

How Variable Life Insurance Works

Variable life insurance, unlike term life insurance, lasts until you die, at which point your beneficiaries receive the death benefit. It also has cash value, which you can borrow or withdraw from. As with other types of permanent life insurance, you pay your premium, and any extra goes to the cash value. 

With a variable life insurance policy, you can choose how to allocate your cash value, within limits. The insurer gives you investment options, which you choose from. 

If your cash value investments do well, your cash value will rise. But if they do poorly, your cash value will fall. If the cash value increases past a certain amount, your death benefit will rise. However, if the cash value falls below the amount of your policy fees and expenses — and you stop paying your premiums — your policy will terminate without value. 

You can also allocate money to an account that yields a fixed rate of interest, which reduces your risk. This rate can change from year to year but usually has a guaranteed minimum, e.g., 3%.

Variable life insurance gives you a way to earn money in the market in a tax-advantaged way. The cash value investments aren’t taxed as ordinary income, so you can borrow against those accounts tax-free.

Example of Variable Life Insurance 

Let’s consider this example:

  1. You buy a variable life insurance policy with an initial premium payment of $300,000.
  2. You put half in a stock fund and half in a bond fund.
  3. In a year, the stock fund grows 8% and now equals $162,000.
  4. In a year, the bond fund grows 3% and now equals $154,500.
  5. Now your cash value has grown by $16,500 to $316,500 on a tax-deferred basis.

This is a simplified example and doesn’t include fees you’d have to pay.

How to Buy Variable Life Insurance

To buy variable life insurance, consider all the costs and whether you expect the investments to outpace the cost of the fees.

Then decide how much coverage you need, what your initial premium payment will be, and what size death benefit you want. 

Contact a broker or life insurance companies to explore their options, and ask what types of investment subaccounts their variable life insurance products offer. Make sure to choose a reputable, financially sound insurance company with good customer service.

If you buy a variable life insurance policy and have buyer’s remorse, you can cancel your policy with no charge and get your premiums back during the look period. Each insurance company’s look period is different, usually around 10 days.

Variable Life Insurance Pros and Cons

More growth potential for your cash valueRisk of cash value decreasing
Control over your cash value investmentsHigher fees
Cash value growth isn’t taxed as ordinary income

Advantages Explained

Growth Potential

If your cash value investments do well, your cash value could grow quite a bit. If you’ve maxed out your retirement accounts or are seeking diversification in your investments or estate planning, variable life insurance may be a good fit.

Control Over Investments

With a variable life insurance policy, you can choose where to invest your cash value. The options usually include:

  • Mutual funds
  • Index funds
  • Money market funds
  • Bond funds

Non-taxable Growth

The cash value’s growth is non-taxable; you only pay taxes if you withdraw funds. Instead of withdrawing, you can also borrow from your cash value — loans are not taxed unless the policy lapses with a loan still on it.

Disadvantages Explained

Investment Risk

Unless you invest some of your cash value in an account with guaranteed fixed returns, there’s no guaranteed return on your money. Investing your cash value in index funds, for example, carries the same risk as investing any money in index funds.

Higher Fees

Variable life insurance policies have higher fees than other types of life insurance. For example, you may have to pay:

  • Fees to borrow against your cash value
  • Fees to transfer money into investment subaccounts
  • Investment management fees, e.g., expense ratios
  • Interest on any loans you take out against your cash value

Who Should Invest in Variable Life Insurance?

If you’re comfortable with investment risks and have a solid understanding of investing, variable life insurance may be ideal. Be prepared for the possibility of losing cash value if your investments don’t do well.

Variable Life vs. Variable Universal: What’s the Difference?

Variable life insurance has fixed premium amounts, while variable universal life (VUL) insurance lets you change your premium amounts. Both variable life and VUL let you invest your cash value in subaccounts of your choosing.

Variable life offers a guaranteed minimum death benefit as long as you pay your premiums. With VUL, you can choose a fixed or variable death benefit.

When you’re shopping around for variable insurance, make sure to specify what type of policy an agent is talking to you about: variable life or variable universal life.

Variable Life Insurance vs. Whole Life Insurance

A whole life insurance policy’s cash value yields a fixed, somewhat low rate of return similar to a savings account. Variable life insurance lets you invest the cash value in securities, which can yield higher returns but also carries the same risk as any investment in securities.

Both variable life and whole life are permanent coverage, meaning that as long as you pay your premiums, the policy will stay active until you die. Both offer a death benefit, and the cash value accumulates tax-deferred.

Variable Life Insurance vs. Term Life Insurance

Term life insurance doesn’t have an investment component and only provides a death benefit if you die while the policy is active. Variable life insurance is lifelong and has an investment feature.

Can I Sell My Variable Life Insurance Policy?

Yes, you can sell your variable life insurance policy. The sale, known as a life settlement, is a fairly clear-cut procedure, but there are important things to do before you go this route:

  • Check Policy Eligibility: Not every policy is eligible for a life settlement. Typically, people over 65 years old or with severe health conditions can sell theirs. Buyers look for policies with a sizable cash value or death benefit.
  • Seek a Trustworthy Broker: Engaging a life settlement broker or provider simplifies the sale. They assist in navigating the process and securing a good deal for your policy.
  • Get an Appraisal: Policy appraisals are free and can be done in a couple of days. They help brokers find out the market value of your policy.
  • Finalize the Sale: With a buyer in place, your broker or provider will complete the sale’s paperwork. 
  • Payment: After finalization, you’ll get a lump-sum payment from the buyer.

Should I Sell My Variable Life Insurance Policy?

Selling your variable life insurance policy can get you a significant lump-sum payment quickly. It comes with downsides, however, including:

  • Loss of Death Benefit: Your beneficiaries won’t get a death benefit after you die. The death benefit provides financial stability and covers end-of-life expenses.
  • Tax Consequences: Any gain from the sale of your life insurance policy is considered taxable income. It’s important to consult with a tax advisor to understand the life settlement taxes you may incur.
  • Potential Loss of Government Benefits: The lump-sum payment received from selling your policy could disqualify you from means-tested government benefits like Medicaid.
  • Privacy Concerns: You’ll have to share personal health information with the potential buyer, which can be unsettling for some people.

Given these downsides, you may have better options, like borrowing against your policy’s cash value or restructuring the premiums. Explore all life settlement alternatives before deciding to sell.

FAQs About Variable Life Insurance

What Is the Greatest Risk of a Variable Life Insurance Policy?

The greatest risk of a variable life insurance policy is that the investments will do so badly that the policy’s cash value is greatly reduced or nil.

What Type of Premiums Does Variable Life Have?

Variable life has fixed (level) premiums.

Can You Cash Out a Variable Life Insurance Policy?

Yes, you can sell a variable life insurance policy by doing a life settlement, or you can surrender your policy. You’ll almost always get more money by selling than by surrendering.

What Happens to the Cash Value of a Variable Life Policy?

The cash value of a variable life policy increases or decreases based on how its investments do. If you take out a loan on your cash value, your cash value will decrease, and your death benefit may as well.

What Is the Difference Between Variable Life Insurance and VUL?

Variable life insurance has a fixed death benefit and premiums, while variable universal life (VUL) insurance lets you choose from a fixed or variable death benefit and premiums. Both variable life and VUL let you invest your cash value.

In Conclusion

Variable life insurance can provide a hedge against inflation by giving you a tax-deferred way to save and grow your investments. If these investments do well, they can increase the death benefit your beneficiaries get.

If you don’t need your variable life insurance policy anymore, you can usually sell it for much more than you’d get by surrendering it. Contact us today to discuss your options.

Sell your life insurance policy for cash.

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