What Is Variable Life Insurance?

There are many different types of life insurance beyond term and whole life. And while each is fundamentally a life insurance product, they’ll have features that make them unique from the others. One of those “other” life insurance products is variable life insurance.

It works very similarly to whole life insurance. But it has enough departures from whole life to make it a separate life insurance type.

What is Variable Life Insurance?

Much like whole life insurance, variable life insurance is another type of permanent life insurance.

That is, the policy will remain in force literally for the rest of your life.

As long as you make your premium payments.

And again, like whole life insurance, it provides both a life insurance death benefit and an investment provision.

But it’s that investment provision where variable life insurance becomes a different financial product.

Where whole life insurance accumulates a cash value, variable life insurance offers a true investment provision.

For example, the cash value of a whole life insurance policy builds gradually and accumulates interest as it grows.

The interest rate paid is relatively low, as is typical with nearly all interest-bearing financial products today.

But it doesn’t build an interest-bearing cash value. Instead, what would represent cash value accumulation in a whole life insurance policy is invested in insurance sub-accounts that work the way mutual funds do.

That gives it a much greater potential for both long-term gain—and loss.

We’re going to cover both possibilities in this article. But it’s important to understand the nature of the investment provision to fully appreciate the difference between variable life insurance and whole life insurance.

Much like the interest on the cash value of whole life insurance, investment gains on variable life insurance policies are also tax-advantaged.

You won’t have to pay tax on those gains that are retained in the policy.

And again, like whole life insurance, the accumulated investment value of a variable life insurance policy can be borrowed against.

You’ll pay the loan back at very favorable interest rates, and there’ll be no tax consequences on the proceeds you receive.

How Does Variable Life Insurance Work?

As you can see, the most distinguishable characteristic of variable life insurance is the investment provision.

Once again, the cash value of the policy is invested in insurance sub-accounts that allow you to invest in equity-type investments.

They are essentially mutual funds managed by the insurance company and made available only to its policyholders.

They are not publicly traded mutual funds, the kind you might invest in through a brokerage firm or a retirement plan.

As the cash value grows, you’ll have the option to withdraw the money. Either in the form of loans or full withdrawal upon surrender of the policy.

At the time of your death, your beneficiaries will receive the policy’s death benefit, plus the accumulated cash value.

But be aware that there may be an additional premium cost for this. Paying extra will allow you to include the accumulated cash value of the policy with the death benefit.

Variable Life Insurance Sub-Accounts

In most cases, you’ll be able to choose between several sub-accounts to invest in.

It depends on the insurance company you purchase the policy from. But the number of available sub-accounts can range from as few as 10 to as many as 50.

As the policyholder, you’ll have the option to choose which sub-accounts you want to invest in.

Your funds can be invested in stock indexes, like the S&P 500, the Russell 2000, or the NASDAQ 100.

But they can also be invested in more specialized funds, like international funds, bond funds, emerging markets, and even money markets.

Most policies also offer some type of fixed interest investment option. This is similar to the cash value of a whole life insurance policy.

Since these funds are investments, you’ll need to evaluate them the same way you would any publicly traded securities, like stocks and bonds.

They’re regulated by federal securities laws and are required to provide you with a prospectus for each fund.

There is one very important caveat when it comes to the investment provision.

The cash value of whole life insurance grows steadily through a combination of cash accumulation and interest payments.

In contrast, the investment portion of variable life insurance can decline in value during downturns in the equity markets.

As is the case with most types of investing, a well-balanced portfolio allocation held for many years is likely to grow over the long-term.

But there may be times when your investment declines in value, even substantially. This will be more likely to happen during an extended bear market in stocks and other investments.

Unlike some life insurance products with cash value or investment provisions, variable life insurance policies typically do not provide a floor on investment performance.

If the value of the fund declines, you’ll feel the full effect of that drop.

Variable Life Insurance Sub-Account Fees

Just as is the case with other types of investment funds, insurance sub-accounts do have fees.

Fund Management Fees

These fees represent the cost of managing the fund, including covering expenses in the management process.

If a fund has a fee of 1.5%, that will reduce the annual return it provides. If the fund returns 8.5% in 2021, the net return is 7.0% after the investment fee is subtracted.

Unfortunately, the fee also applies even when the fund declines in value.

If the fund loses 8.5% in 2021, the total loss is 10.0% after the investment fee is subtracted.

Put another way, the investment fund fee reduces the return on your fund on the way up and increases the loss on the way down.

Be aware of the fees associated with any fund you invest in. And the potential impact it has on the long-term performance of the investment fund.

But investment fund fees are not the only costs associated with it.

Up-Front Costs

There are fees associated with the life insurance itself, including up-front costs.

These include administrative fees and sales commissions paid to insurance brokers and agents. These consume most of the premium in the early years the policy is in force.

But there are also ongoing administrative fees for the management of the policy.

You should also expect to pay surrender charges. These are percentage fees assessed by the insurance company for partial or full withdrawal of your cash value.

They normally work on a sliding scale of between 1% and 10% of the amount of cash you withdraw.

In the first year of the policy, the fee may be 10%, declining to 1% by the 10th year. Each company will have its own schedule regarding surrender charges.

Unfortunately, variable life insurance policies have some of the highest fee structures in the insurance industry.

Who is Variable Life Insurance For?

Since you probably wouldn’t purchase a variable life insurance policy solely for investment purposes, you’ll also have an insurance requirement.

Like most cash value/investment-type life insurance policies, variable life insurance combines a life insurance death benefit with an investment provision.

Not Scared of Risk

You’ll also need to have a healthy appetite for risk. As described above, variable life insurance policy investment values can potentially both rise and fall.

Similar to investing in the stock market, you’ll need to be able to tolerate the downs with the ups.

Familiar with the Stock Market

The life insurance agent or broker may provide you with advice. But the ultimate decision on what sub-accounts to invest in will be yours.

So you’ll need to be familiar with the type of investments you’ll be allocating your money to.

And since there is risk involved in the investment side of a variable life insurance policy, it’s important to be adequately diversified.

You can diversify within the policy itself, holding investments in fixed income-type assets like bonds and money markets. But you should also be adequately diversified outside the policy.

This will mean having cash and fixed-income investments outside the policy itself.

In addition to being a life insurance policy, variable life insurance is an investment vehicle with substantial risk

You’ll need to have the type of diversification—both inside and outside the policy—that recognizes and accommodates that situation.

Knowledge of Investing

You may need both life insurance and an investment capability. And you’re fairly sophisticated about investing. However, you need to understand that variable life insurance policies are complex financial contracts.

They have a lot of “moving parts” that are not well understood outside the insurance industry. And each of those moving parts has its own set of limitations and fees.

You need to understand how it works and under what circumstances it will apply.

If you don’t understand yourself, have the policy reviewed by a trusted financial advisor.

The advisor must be familiar with how life insurance works, specifically variable life insurance.

Who Should Avoid Variable Life Insurance?

If you only need life insurance, term life insurance will be the better choice. Not only is it pure life insurance, but it’s also the least expensive type.

It costs only about 10% as much as investment-type life insurance. So it will save money, and you’ll be able to purchase a larger policy.

You’ll also want to avoid variable life insurance if you have a low tolerance for investment risk.

You can lose money on the policies in any given year. And if that makes you uncomfortable, variable life insurance policies are not for you.

The same is true if you have limited or no investment experience. Variable life insurance policies are essentially self-directed investment plans.

They require both a thorough understanding and the ability to manage properly. If that doesn’t describe you, you need to avoid this type of life insurance.

Finally, the cost is a major factor. Variable life insurance includes both a death benefit and an investment provision. So it’s an expensive insurance product.

You’ll need to have the room in your budget to accommodate the premium. As well as the likelihood of stable or rising future income that will make maintaining the policy possible.

Variable Life Insurance Pros & Cons


  • Combines two critical financial needs in one plan: life insurance and investing.
  • The investment gains in the policy will accumulate on a tax-deferred basis, similar to retirement plans.
  • There are no limitations on how much you can contribute to the investment portion of a life insurance policy. So you can use a variable life insurance policy as a retirement savings supplement.
  • You’ll have a choice over the sub-accounts your money is invested in.
  • Once the cash value reaches a certain level, the policy may be “paid up,” eliminating the need for future premium payments.
  • A successfully invested variable life insurance policy can easily outperform a comparable investment in a whole life insurance policy.


  • Variable life insurance policies contain a lot of fees, including some large ones up front. And a multitude of fees throughout the life of a policy.
  • Policy fees will both reduce investment returns in positive years and extend losses in down years. This, at least somewhat, reduces the main benefit of variable life insurance policies, which is the investment provision.
  • Policies are particularly complicated, and not designed for consumers who are not familiar with how they work.
  • There may be tax consequences on cash withdrawals that exceed the amount of your contributions to the investment portion of the policy.
  • The investment provision in a variable life insurance policy is a self-directed plan. You’ll be the one managing your investments within the policy, not the insurance agent.
  • Investment performance is not guaranteed. And it’s subject to the risk of loss in any given year, or even in several years.

Bottom Line

Variable life insurance policies can work for a very limited number of consumers. That certainly includes those who have investment experience and are comfortable managing their sub-accounts.

It also includes those looking to create additional savings for retirement, in excess of what they can contribute to regular retirement plans. A variable life insurance policy can represent a valuable supplement to those plans.

They are especially valuable if you are late in saving for retirement and need to save as much as possible in the next few years.

But for the typical consumer, the better choice will be term life insurance.

They are simple policies, and much less expensive. That means they’re both easier on the budget and provide you with an opportunity to purchase a higher level of life insurance benefit.

And even if you choose a term insurance policy, you can also begin investing on your own.

After all, publicly-traded mutual funds—similar to the sub-accounts offered by life insurance companies—are readily available.

If you’re going to choose investments in a variable life insurance policy, the same capability exists with a self-directed brokerage account.