What is variable life insurance?


Variable life insurance (VLI) is a form of permanent life insurance. An VLI policy is structured to benefit you financially during your lifetime and your beneficiaries after your death by providing more than just a death benefit. The cash value of a variable life insurance policy can be invested, offering greater potential returns than other types of permanent life insurance.

Variable life insurance (VLI) is a form of permanent life insurance which, as the name suggests, is designed to last the life of the policyholder. Like other forms of permanent life insurance cover, VLI policies have an investment component known as cash value as well as a guaranteed death benefit in most cases. So as long as you pay your premiums and follow the policy rules, coverage will stay in effect.

Variable capital life insurance is an option for people who are not afraid of risk. The cash value of an NAV policy can be invested, but returns are not guaranteed. When the market is doing well, so can your policy’s cash value. If the market is bearish, your VLI policy could lose value, although many policies have a floor to protect against negative returns. Depending on the company and the wording of the policy, your earnings may be capped at a certain percentage, with any excess returns being lost to the insurer.

Variable life insurance premiums are placed in an account for investment purposes, and you, as the policyholder, can choose how to allocate this cash value among a series of investment vehicles or sub -accounts like mutual funds. Depending on the policy and insurer, you may also invest part of your cash value in a fixed rate sub-account.

As with any investment, there is risk. If the market does poorly, the cash value of your policy could suffer. But if all goes well, so will your policy’s cash value, potentially giving you additional funds that you can access by borrowing or withdrawing or redirecting to the policy’s death benefit. Note that this may negatively affect your death benefit or subject you to taxes or fees.

The cash value of a variable life insurance policy increases on a tax-deferred basis. You won’t have to pay tax unless you withdraw the funds (which is different from borrowing against the cash value). If you choose to take out a loan on your life insurance policy, you will not be taxed on the amount you borrow. Plus, the IRS doesn’t count the death benefit as gross income, so your beneficiaries don’t have to pay taxes on the amount they receive.

If you’re still wondering if an open-ended life insurance policy is worth it, consider the following pros and cons.


  • VLI’s market-based investments offer higher potential returns than whole life or universal life policies.

  • A VLI policy can only be terminated if you stop paying premiums.

  • The cash value grows on a tax-deferred basis.

  • Premiums are fixed for the term of the policy.

  • You can borrow against the cash value balance of the policy.

The inconvenients:

  • Market volatility can have a negative effect on the cash value of the policy.

  • VLI policies have fees and other charges associated with the investment component of the policy.

  • Failure to repay a loan made from the cash value account will reduce the amount of the death benefit.

Both term and NAV have fixed premiums. Premiums for term life insurance are on average lower than those for permanent life insurance products like VLI because term life insurance coverage does not have an investment element that increases the cash value at over time. In addition, a temporary lifetime death benefit is only guaranteed for the duration of the policy. Depending on the insurer and the policy, terms can range from one to 30 years or more. With VLI and other forms of permanent life insurance, coverage lasts for the life of the insured.

Variable life insurance and whole life insurance are both forms of permanent coverage. Premiums are level and none of the policies can be canceled due to changes in your medical condition. Both types of life insurance also have a death benefit and accumulate tax-deferred cash value over time.

The biggest difference between the two is the growth opportunity and the level of risk. The cash value of a whole life insurance policy pays a fixed and relatively low interest rate, similar to that of a savings or money market account, and the death benefit is guaranteed. An VLI policy has more flexibility, giving you the ability to invest that cash value in securities such as mutual funds. However, it may also be more volatile, increasing or decreasing its redemption value based on market performance, and you will be subject to fees associated with managing this investment component.

Despite having similar names, variable life insurance (VLI) and variable universal life insurance (VUL) are different types of permanent life coverage. Both have a cash value account that can be invested. Depending on your needs, VUL can offer more flexibility than VLI. VUL policies allow you to adjust the premium amount in the same way as a regular universal life insurance policy. However, increasing or decreasing your premium will affect the amount of the death benefit. In contrast, VLI premiums are fixed and death benefits are guaranteed in most cases.

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