Variable Life Insurance: Is It Worth It?

Investing and building wealth is important to have a secure future. Buying life insurance is also important to make sure your family is cared for if something happens to you. When you’re interested in investing, you have many options—and you also have a variety of choices when it comes to protecting your family in case of your death.

Different investment options include money market funds, stocks and bonds, investing in a retirement account like an IRA, or life insurance coverage. In terms of being an investment product, there are different life insurance options that may work for your needs such as a variable policy or a universal life policy.

On this page:

• How Variable Life Insurance Factors Into Whole Life Policies
• Understanding Variable Life Insurance Policies
• Benefits of a Variable Life Insurance Policy
• Drawbacks of a Variable Life Insurance Policy
• Is Variable Life Insurance Worth It?

How Variable Life Insurance Factors Into Whole Life Policies

If you want to simplify your life, you may decide to purchase whole life insurance because whole life policies both allow you to invest your money and help you protect your family by paying out a guaranteed death benefit if you pass on. Whole life policies are popular investment products because of their simplicity, but they have downsides both as insurance products and as investment products.

If you’re thinking about getting whole life insurance, you need to know the pros and cons. You also need to understand that there are different kinds of whole life insurance—including variable life insurance.

What is Variable Life Insurance?

Variable life insurance offers your family lifetime protection, and the investment component of the policy could produce better returns than other kinds of whole life coverage in terms of cash value accumulation. There are also big tax benefits to investing in a variable life policy. But, while there are advantages, there are disadvantages too, including high fees.

The rest of this guide will provide insight into everything you need to know to decide if a variable life policy is right for you as you start the process of getting life insurance quotes and determining your life insurance needs for retirement planning and estate planning. 

Understanding Variable Life Insurance Policies

Insurance coverage that protects your family in case of your death is broadly divided into two general account types:

• Term life policies are the cheapest option, but they provide coverage only for a limited time. If your policy is a 20-year term policy and you don’t die within the 20 years of coverage, no death benefit will be paid out. The goal is for your family not to need the coverage by the end of the term, perhaps because your kids are grown, your home is paid off, and you’ve got money in the bank.
• Whole life policies are costlier, but you’re covered for life unless there is a lapse in insurance for the policy. Sometimes, your family may need this lifetime coverage, such as when your child is disabled and will always need financial help.

Term life insurance products are simple, but whole life policies are complicated. One reason they’re so complicated is that there are different kinds of whole life policies offered by any given life insurance company. While all whole life policies cost more than term policies and invest excess premiums so your policy accrues cash value, the specific means by which money is invested and grows differs with different policy types.

Variable life policies are one specific kind of whole life coverage. With a variable life policy, some of your premium payment goes to securing the death benefit, and other money is invested into sub-accounts that are similar to mutual funds. Most policies have many sub-accounts to choose from, so you can decide how your money will be invested.

As the assets you’ve invested within your sub-accounts grow in value, your policy’s cash value grows. But, if your investments decline in value, the cash value of the policy could go down.

The terms of variable life policies and the costs of these policies can vary from insurer to insurer. Your age and health will also affect coverage. So, if you decide to get a variable life insurance policy, it’s imperative you shop around for coverage.

Benefits of a Variable Life Insurance Policy

Variable life insurance policies present some big benefits. Some of the key advantages include:

• Lifetime protection: Unlike a term policy, your family members can be provided for by your variable life policy no matter when you pass away as long as you kept the policy active.
• Investing flexibility: Many variable life policies provide multiple options for sub-accounts to invest in. This gives you flexibility in deciding how to invest your funds.
• Tax-deferred growth: For many, this is the single biggest benefit. When the cash value of your policy grows, this growth isn’t taxed as ordinary income. And, you can access the money in your variable life insurance policy in retirement by taking out loans using the account as collateral. This allows you to receive the funds without having to pay any income tax at all.
• The potential for higher gains: Variable life policies can provide you with a better return on investment than many other kinds of whole life insurance policies.

Drawbacks of a Variable Life Insurance Policy

While the advantages of a variable life policy make this type of insurance sound very good, there are big downsides to consider too. Some cons of variable life insurance include:

• High premiums: You’ll pay much higher premiums for variable life insurance than for term life insurance with the same death benefit.
• Premiums could rise: If your investments don’t perform well, your premiums may be increased so more money is available to go into your sub-accounts.
• High fees: Each of the sub-accounts your money is invested in will typically assess fees. These fees are often higher than fees for similar mutual funds you could purchase in a regular investment account.
• The potential for capped growth: Some insurers cap the amount your policy’s cash value can grow. That means if your investments do very well, your policy won’t go up as much as it should.
• Other investments could perform better: Many experts believe you can earn better rates of return on other investments—such as mutual funds—compared with variable life insurance.
• Uncertainty: If your sub-accounts don’t perform well, your cash value could go down. Some life insurance investors prefer more certainty that they won’t lose money and will earn at least a minimum guaranteed return.

Is Variable Life Insurance Worth It?

Variable life insurance provides tax benefits, flexibility in investing, and the potential for better returns than certain other whole life policies. It can also ensure your family is provided for no matter when you pass on.

However, downsides, including high costs, can’t be ignored. Ultimately, you should consider all your options to decide if variable life insurance is right for you. If you decide to get covered, shop around, as policy terms differ and some insurers provide better terms and more diversified investment options than others.