Variable life insurance is a policy that pays out a death benefit and includes various investment options, subject to market volatility. / May 23, 2022 
When it comes to life insurance, it’s easy to feel overwhelmed. Do you want term or permanent coverage? How much coverage do you need? Can you qualify? Who should you name as a beneficiary? What if your circumstances change later on? Variable life insurance is just one of the options that you may come across when shopping around for coverage. Here’s what you should know about it, including how it works, costs and risks. Variable life insurance is a policy that provides a payout to your beneficiaries when you die, and the opportunity to earn money. These policies are valid for the rest of your life, or as long as you pay the premium. That payment is fixed, meaning what you pay now is what you’ll pay until death. Part of the premium pays for the death benefit, and part of it goes into an account, where the money can be invested. That’s known as the cash value, which you can borrow against. The policy is “variable” because the cash value can fluctuate depending on where it is invested. Companies can offer a number of different options to choose from, including stocks and bonds. “In a variable product, the policyholder is getting to choose how they invest it, so the policy can perform a lot better than a non-variable policy, but it can also perform a lot worse,” says Jay C. Judas, chief executive officer of the Life Insurance Strategies Group. Tip: Variable life insurance is often confused with variable universal life insurance. Variable universal life insurance is a permanent policy with investment options. Unlike variable life insurance, however, premiums are not fixed.[1] Because of those fluctuations, the death benefit for your beneficiaries could take a hit, but you can typically purchase a guaranteed death benefit rider, which means that even if your cash value performs poorly, you’d still get the full death benefit. The cost of variable life insurance depends on many factors, like how much coverage you want, what riders you purchase, and your age, gender and general health. Variable life policies will also come with fees, including on administration, loan interest and sales.[2] Tip: If you are considering a variable life policy, it’s important to ask for the prospectus, a document filed with the Securities Exchange Commission detailing risks of the policy, which is free. That contains vital information, like fees, expenses, investment options and other features.[3]
Variable life policies are not without risk. As mentioned above, because you have the ability to choose your investments, you can potentially earn more than you’d get with something like a whole life policy, which caps cash value. On the other hand, if the market performs poorly, you could lose money.[5] “A lot of the risk in how the policy performs is shifted to the policyholder as opposed to the insurance company. So you definitely … have to be comfortable making those investment decisions,” says Judas. Another key consideration here is that because of the often high fees and expenses associated with these policies, it’s not worth it if you’re using it as a short-term savings option.[2] So if you’re looking for that, you might be better served with another type of policy, like a whole life policy that guarantees certain returns. At the end of the day, variable policies may not make sense for a lot of people, especially since other options come with less risk. However, for those who like to take a hands-on approach to their finances, are OK taking on more risk in exchange for a potentially higher reward or are willing to pay extra for riders to protect their investments, it may be a useful option.
Advice November 5, 2022 We’ve rounded up the best life insurance companies based on customer satisfaction, cost, financial strength and more. Guide September 26, 2022 How much cash can you expect to have in a life insurance policy with cash value? Let’s take a look. Guide September 15, 2022 You can borrow from permanent (not term) life insurance coverage, but there are pros and cons to consider. August 25, 2022 Life insurance can provide a way to plan ahead for retirement, particularly if you know how and whether to tap living benefits. Advice July 22, 2022 Life insurance is meant to be a boon to your family when you die, but there are some benefits you can tap into your policy sooner if necessary. Advice June 28, 2022 Life insurance offers a way to protect your family financially upon your death. Different types of policies are available. |
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