Variable Life Insurance: Higher Risk, Higher Reward?

How Variable Life Works

Variable life insurance is a permanent policy where the cash value is invested in sub-accounts similar to mutual funds. You choose from a menu of investment options including stock funds, bond funds, and money market funds.

Unlike whole life with guaranteed cash value growth, variable life cash value fluctuates with market performance. In good years, your cash value can grow significantly; in bad years, it can decline.

Potential Benefits

Variable life offers the highest potential cash value growth among permanent life insurance products. Over long periods, stock market returns have historically outpaced the guaranteed rates offered by whole life and universal life.

You maintain control over your investment allocation and can adjust it based on your risk tolerance and time horizon. Many policies also guarantee a minimum death benefit regardless of investment performance.

Significant Risks

Market downturns can erode your cash value, potentially requiring additional premium payments to keep the policy in force. In severe scenarios, the policy can lapse if the cash value drops too low to cover policy costs.

Variable life insurance fees are typically higher than other permanent policies, including mortality charges, administrative fees, and investment management fees that can total 2-3% annually.

Because of the investment component, variable life insurance is classified as a security and sold by prospectus. Make sure you understand all fees, risks, and limitations before purchasing.