Rachael Brennan has been working in the insurance industry since 2006 when she began working as a licensed insurance representative for 21st Century Insurance, during which time she earned her Property and Casualty license in all 50 states. After several years she expanded her insurance expertise, earning her license in Health and AD&D insurance as well. She has worked for small health in...

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

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Reviewed by Benji Carr
Former Licensed Life Insurance Agent

UPDATED: Dec 1, 2020

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Quick Facts

  • Variable life insurance is one of the riskier life insurance policies available
  • Premiums are invested in mutual funds, which can rise or plummet during the lifespan of variable life insurance
  • Beneficiaries will receive whatever the current value of the policy is, whcih can be low if the variable life insurance investments are doing poorly

Variable life insurance is just one of the many life insurance terms you may hear thrown around when shopping for a policy. If you are considering buying a variable life insurance policy, there are a number of things you should know beforehand.

While a variable life insurance policy will pay out a variable life insurance death benefit to your beneficiary, the amount is not as stable and fixed as other types of life insurance policies.

Variable life insurance is based on what type of premium? To learn this and more about variable life insurance premiums and how it works, as well as if it is the right choice for you, keep reading.

Want to start shopping for a variable life insurance policy right away? Use our free tool above to find the best affordable variable life insurance quotes.

Definition of Variable Life Insurance

What is a variable life insurance policy? Unlike other life insurance policies, variable life insurance has a cash value component. This cash value is made up of investments. Basically, your money is put toward whatever subaccounts you want, which are essentially mutual funds (stocks, bonds, etc.) within variable life insurance.

So what’s the catch? As with any investment in a stock market setting, there isn’t a guarantee your variable life insurance investments will always do well. This means you are taking a bit of a gamble when you sign up for a variable life insurance policy (there’s are a reason “variable” in the name).

For example, if policyholders die while the variable life insurance investments are plummeting, the beneficiaries could end up with less than the policyholders intended.

The good news is that variable life insurance policies have a guaranteed death benefit. This is the minimum amount the insurer will pay out, even if the investments drop below this number.

While this may seem risky because the guaranteed death benefit is still low, the reverse could also happen. The investments could be doing fantastic at the time of death, resulting in a very high death payout.

How do variable life insurance death benefits work?

So how do the beneficiaries receive the benefit of the policy from the  variable life insurance company? The death benefit payout is cashable, meaning you will usually receive a check from the insurance company.

In most states and situations, this death payout is tax-free. While you will usually have to pay taxes on any interest you earn from the money in the future, the initial lump sum won’t count as taxable income.

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Variable Life Insurance Pros and Cons 

Is variable life insurance a good investment? If you are torn about whether the variable life insurance risk is worth it, don’t fret. We are going to recap and go over some of the main advantages and disadvantages to variable life insurance.

What are the benefits of variable life insurance? Take a look at the list below.

  • Variable life insurance covers you for your whole life. Unlike  different types of term life insurance, variable life insurance lasts until you die (as long as you keep up with payments).
  • Payouts are tax-free. You don’t have to worry about the government taking a hefty chunk of your beneficiates’ payout.
  • Your investments can increase significantly. While there is a greater risk, there can also be a greater reward with variable life insurance.
  • You get to chose your investments. Your money isn’t just thrown into random stock market accounts. You get to choose where your money goes and into what accounts.
  • Your policy payout won’t drop below a pre-specified amount. Even if the stock market crashes, your beneficiaries will still receive a payout.

Before these pros make you leap into signing up for a variable life insurance policy, make sure to fully consider the cons.

  • You have to be hands-on with variable life insurance. Unlike other policies, where you pay your premiums and that’s it, variable life insurance requires you to monitor your investments. If you don’t, you could end up with a nasty surprise when you check your payout value five years later.
  • You still have to pay taxes on withdrawals. If you withdraw an amount from your life insurance policy that is greater than the premiums paid, you will usually have to pay taxes.
  • Premiums are more expensive. Because there are more people working to manage investments, there are administrative fees that can raise the cost of a variable life insurance policy. This means the cost of variable life insurance is generally higher than other types of policies.
  • Premiums aren’t fixed. If you are wondering how much does variable life insurance cost, the answer is, it depends. With some life insurance policies, you pay a locked-in rate your entire life. With variable life insurance, premiums can become more expensive over time.

So who should get variable life insurance? Anyone who can stomach the higher risk of a variable life insurance policy. If you want dependable coverage with low risk, variable life insurance may not be for you, especially if you need to take out a variable life insurance loan to pay for coverage when stocks drop low.

How to Cancel Variable Life Insurance Policy 

Even though a life insurance policy is meant to last your entire life, there are a number of reasons people may choose to end their policy. Perhaps they no longer need to worry about their beneficiaries’ financial welfare, or they’ve decided to switch to a different provider or life insurance coverage.

Whatever the reason, it is important that you cancel your variable life insurance policy correctly so you aren’t held liable for unpaid premiums and you get as much financial return as possible.

There are a few different options to cancel. You can surrender your policy, but you usually don’t receive anything back from your investments.

Or you can sell your life insurance in what is known as a life insurance settlement. With this option, you will get immediate payment, with the agreement that the death benefit from this policy will go to whoever bought out your policy.

According to the Insurance Information Institute (III), in 2018, $784 billion was paid out in life insurance benefits and claims.

Out of this amount, $350 billion was paid for “surrender benefits and withdrawals from life insurance contracts made to policyholders who terminated their policies early or withdrew cash from their policies.”

Whatever option you decide, it is best to first consult with a lawyer or financial adviser on what your best option is when canceling, especially if there is a large lump sum in your variable life insurance policy. The last thing you want is to cancel your policy and get an unfair cancellation refund.

What are comparible coverages to variable life insurance?

If you want someting similar to variable life insurance, variable universal life insurance is similar but slightly different. When it comes to a variable life insurance vs universal life insurance policy, there is one big difference.

While a variable universal life insurance policy still has an investment component, it is combined with the benefits of a whole life universal policy.

A universal policy earns interest at a fixed rate set by an insurer, so it is less risky than a variable policy. Combined, the two create a less risky option than a plain variable life insurance policy.

We hope our guide to variable life insurance has cleared things up for you. You should now know the variable life insurance definition and much more.

Ready to buy variable life insurance? If you are ready to start shopping for variable life insurance (or any life insurance policy) use our free tool below. Which variable life insurance company is for you? Find out now.