What Is Variable Life Insurance?

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Have you ever heard the sayings “no risk, no reward” or “no pain, no gain”? Well, that’s exactly how variable whole life insurance works. It offers more investment options than other types of life insurance, but it also comes with higher risks and more frequent charges.

So, if you’re someone who likes the thrill of a risky bet and doesn’t mind paying suspicious fees, variable life insurance could possibly be for you. Actually, no—it’s not a good idea for anyone. There’s a better way to take care of your life insurance and investing needs.

Let’s go over everything you need to know.

1. What is variable life insurance?
2. What are the key risks of a variable life policy?
3. How does the death benefit work in a variable life policy?
4. How do I get out of a variable life policy?
5. What’s the difference between variable life insurance and whole life insurance?
6. What’s the difference between variable life insurance and term life insurance?

Variable life insurance is a type of whole life insurance. That means it’s part life insurance, part savings and investment. It gets its name from the way the cash portion of the policy is invested—you get to pick from a variety of investment options and the value of those options can vary (go up and down) over time.

These places where you can invest your cash are called sub-accounts. And they let you put your money into all kinds of things—stocks, bonds, mutual funds, money markets. Most variable life insurance policies have lots of sub-accounts to choose from—some offer more than 50 options. This lets you manage your investments and also gives you a potentially higher return than other life insurance options.

But here’s the deal: Life insurance has one job—to provide for your loved ones when you die. It’s not a way to build wealth. You’ve got way better options for both life insurance and investing that don’t involve whole life policies like variable life insurance. We’ll get to that in a bit.

Typically, variable life insurance comes with more investment risk than other types of permanent life insurance policies. And just like with traditional investment options (mutual funds, index funds, etc.), there are dozens of risk levels.

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While you have more options for your money with a variable life policy, they come at a steep price. Think about it. If the investment option you pick performs poorly, you’re the one who loses money, not the insurance company. Sound risky? It is.

Here’s a breakdown of what to watch out for:

• Policy fees and expenses: Not only are there fees when you buy the policy—called introductory fees—but there are also ongoing fees that can increase over time. Here’s a quick list of what you’ll be dealing with if you buy a variable life policy: premium payments, surrender charges, and ongoing investment management and administrative fees. And don’t forget those charges reduce the value of your cash account.
• Policy lapse: Insurance companies keep a close watch on how much money you have in your cash account. If you don’t have enough money to cover policy fees, your policy could lapse, and your coverage would be cancelled.
• Risk of loss: Remember when we mentioned the phrase “no risk, no reward”? Here’s where that idea hits home. If the investments you pick don’t do well, you’ll likely lose money.
• Insurance company risk: Since the insurance company that issues your variable life policy backs all guarantees, including the death benefit, it’s super important to pick the right insurance company. Make sure the one you pick has a solid history of financial strength.
• Transaction fees: Every time you request a service, you get charged a transaction fee. So, think twice before you request a report or transfer or withdraw money. Each request is logged by the insurance company, and a transaction fee shows up on your monthly statement.

The death benefit is the amount of money that goes to your beneficiaries when you die. When you buy a variable life policy, you select a face amount. This is the amount of your death benefit (like $500,000).

Every time you make a premium payment, part of your payment goes toward the cost of keeping the death benefit in place so it’s available to your beneficiaries. The other part of your premium goes to build the cash account.

Depending on the death-benefit option you chose when you bought the policy, your beneficiaries could also get the face amount plus the cash value of your account, or they could get the face amount plus the total of your premium payments.

Here’s an example.

Let’s say you paid $50,000 in premiums for a variable life policy over your lifetime. And your cash value account is worth $75,000. If the face amount of your policy is $500,000, your beneficiaries will receive one of the following, depending on which death-benefit option you picked:

• Based on your face amount only: $500,000
• Based on your face amount plus the cash value of your account: $575,000 ($500,000 + $75,000)
• Based on your face amount plus your premium payments: $550,000 ($500,000 + $50,000)

You can see that variable life insurance does give you options. But not everyone loves the uncertainty of those options.

If you change your mind about life insurance, you can cancel (aka surrender) your variable life policy. If you just stop paying your premium without telling your life insurance agent, the policy will lapse, and you’ll be charged a surrender fee. The best way to cancel your policy is to talk with your insurance agent first to see what cancellation options are allowed.

Typically, if you cancel your policy within the first 10 days of buying a variable life policy (this period varies depending on your insurance company and state), you won’t be charged a surrender fee. Instead, you’ll get a refund of the premium you already paid.

If you cancel after the free look period (that’s actually what they call it in the insurance biz), you’ll most likely be charged a surrender fee.

Like we mentioned earlier, variable life insurance is a type of whole life insurance. Both have a cash value investment piece, but the way the investment options operate is very different.

First, let’s take a look at whole life insurance. For whole life insurance policies, the insurance company decides how and where to invest the money in your cash account. This is a much more conservative type of life insurance.

In a variable life insurance policy on the other hand, you make investment and asset allocation decisions. That means you need a solid understanding of how investments, like stocks, bonds and mutual funds, work. Because ultimately, you’re the one responsible for gains and losses.

Okay, so you’ve probably guessed by now, we’re not fans of variable life insurance. But we are huge fans of term life insurance. Let’s compare the two.

We’ve mentioned that variable life insurance is a “no risk, no reward” type of life insurance. But that’s just the tip of the iceberg. The management fees attached to each variable life investment option are sky-high. Not only that—the fees are also automatically deducted from your cash account. And if you don’t have enough money in your cash account, the money will be collected through a hike in your premium. What if you can’t swing a higher premium? Get ready to see the policy lapse. Yikes!

Think about that for a minute. Every month, you’re paying to keep your life insurance policy active and you’re getting dinged by the insurance company to manage the investments inside your policy. Ouch!

Term life insurance costs way less than a variable life insurance policy with the same death benefit. That’s because term life is just life insurance. No cash value account with expensive investing or management fees.

And since you’re saving on life insurance, you have more money to invest in retirement accounts like your 401(k) and Roth IRA. That’s how you take care of your life insurance needs and build real wealth!

We always recommend term life insurance over variable life insurance.