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What Is Variable Life Insurance?

Variable life insurance, also known as variable universal life insurance, is one of the most common life insurance options on the market today. But what is variable life insurance, and should you carry it?

Variable life insurance is a form of permanent insurance which offers a variety of investment options to the policy holder. It pays a death benefit to one’s beneficiaries, provides tax advantages, and builds a cash value over time.

Unlike a traditional life insurance policy, a variable life insurance policy provides the policy holder with more investment options, resulting in greater upside potential. 

How Does Variable Life Insurance Work?

This policy is a blend between traditional insurance and a security or investment option. Having a variable life insurance policy comes with a great investment risk, but there is still an insurance component that will insure the policyholder and pay a death benefit to beneficiaries upon the policy holder’s passing. 

Does Variable Life Insurance Have Cash Value?

Yes, variable life insurance has a cash value, and this cash value can build over time. Considering the numerous investing options that come with a variable life insurance policy, this cash value can actually grow at an accelerated rate when compared against other life insurance options. 

With that said, with greater opportunity for higher returns, there is also a higher associated risk factor – which is why this insurance is considered a security and governed by the Federal security laws.  

Can You Cash Out a Variable Life Insurance Policy?

It is possible to cash out a portion of your policy. Any cash you take out of your policy will reduce the death benefit by the amount of cash you borrowed or withdrew.

If the cash is paid back though, the death benefit will increase in alignment with what was paid back. 

Do I Get Money Back If I Cancel My Life Insurance?

There are a few reasons why one may wish to cancel their life insurance. Perhaps they can no longer afford it, wish to allocate their money to another investment, or no longer need a life insurance policy.

One of the most commonly asked questions is – do I get my money back if I cancel my life insurance? Unfortunately, there is not a one size fits all approach to this answer.

Generally speaking, you may need to pay a fee to cancel your policy. However, depending on the type of policy, and insurance company, it will vary how much money you will be able to receive. 

What Is the Greatest Risk in a Variable Life Insurance Policy?

The greatest risk is the fact that the insurance company cannot guarantee a rate of return. This type of policy invests in a variety of investment options.

Investments include mutual funds, equities, and bonds, just to name a few. These investments can increase at a rate above and beyond the rate of return a typical life insurance policy can expect, or they could also be less. 

The paradox is, the greatest risk associated with variable universal life insurance is also it’s most sought after benefits.  

Can I Change My Mind?

This policy does allow you to change your mind and cancel. In fact, if you do this within a specific period of time, you can get 100% of your money back.

If you do not do this within the policies cancelation window, it is not guaranteed you’ll be 100% refunded for the money you put into the policy. 

How Much Does Variable Life Insurance Cost?

Considering the management fees associated with a variable life insurance policy, these policies tend to be more expensive than other life insurance alternatives. Remember, a variable life insurance policy invests in a variety of securities and investments.

There are administrative fees and management fees associated with these investments, which drives up the monthly premium. 

Example of Variable Life Insurance

A variable life insurance policy works the same way as a whole life insurance policy in the sense that the policyholder’s beneficiary will receive a death benefit when the policy holder passes away. Depending on one’s age, health, family history, occupation, and insured amount, the monthly premium will vary by individual. 

The difference comes in the fact that the cash value of a policy will be allocated to a variety of investment options. These investment options can generate a greater return on investment when compared to a traditional life insurance product. 

Things To Do Before Investing in Variable Life Insurance 

Before choosing to purchase or invest in a variable life insurance policy, you should know and have answers for the following commonly asked questions. 

Make Sure You Understand How It Works 

The best investments don’t happen by luck. They are deliberate efforts to generate a rate of return aligned with your investing expectations.

Before investing in a variable life insurance policy, you need to fully understand how it works. 

Understanding Costs, Fees, and Expenses 

There are a variety of costs, fees, and expenses, associated with a variable life insurance policy. We’ll be covering these fees in greater detail below, but be sure to factor these fees into the desired rate of return you need to generate. 

Understanding the Risks 

All investments come with risks, and a variable universal life policy is no different. If you can’t accept the risk that comes with this investment option, perhaps a more traditional insurance policy will be a better fit for you. 

Review the Prospectus 

An insurance prospectus is the legal disclosure document in alignment with the SEC. A policy holder can read this prospectus to better understand the various investment vehicles they can invest in.

Common information a prospectus will include is; dividend information, information regarding the portfolio managers, and the investment objectives. Additionally, information regarding the insurance and death benefit will also be in the prospectus. 

Review All Materials Provided 

With that said, the prospectus does not indicate how much insurance one purchased, or the amount of fees one will pay. For that reason, it’s important you review all the materials you were ever provided, and request any information or material for questions you may have. 

Variable Life Insurance Fees & Expenses

If you have variable life insurance, you’ll be paying your fair share of fees and expenses. Such fees/expenses include: 


A premium is how much money the policyholder must pay each month to keep the policy active. If the premium is past due, an insurance company reserves the right to limit or refuse paying a death benefit as the insurance will be cancelled. 

Surrender Charge

A surrender charge fee occurs when the policyholder surrenders the policy, or withdraws against the policy in the infancy stages of the contract. 

Administration Fees 

All insurance policies have administrative work that must be done. Considering the complexity of variable life insurance, the administration fee is often above and beyond what a typical life insurance policy may charge. 

Loan Interest

Some variable life insurance policies allow the policyholder to take a loan out against the policy. The insurance company often charges interest on that loan if you did in fact borrow money against the policy. 

The Underlying Fund Expenses

Many mutual funds come with a fee. In addition to the fees you’ll pay for the insurance portion of this policy, you must pay the corresponding investment fee for investing in a given security or mutual fund. 

Transaction Fees 

Transaction fees cover the various edits/requests you may make to the policy. For instance, if you decide to move money from one investment option to another, a transaction fee may apply. 

Key Risks Involved With Variable Life Insurance

All investments come with risk and variable life insurance is no exception. The following risks need to be taken into consideration before deciding if this is the right option for you. 

Be Aware That Savings Will Take Time

Variable life insurance is not exactly a savings plan. The policy builds in value over time, but the main purpose is to provide a death benefit or meet longer term financial goals.

This is not a ‘get rich quick’ program. 

Your Policy May Lapse

Your policy will terminate if the policyholder does not cover the fees above. Even if you’ve had this policy for ten or twenty years, if you start to fall behind on your payments in later years, you are at risk of losing it. 

The Risks Brought On By Investments 

Investments are not guaranteed to increase every year. A traditional whole life insurance policy may provide a guaranteed rate of return, but by no means is this guarantee applicable to a variable life insurance policy. 

Overall Risk For Loss

Following the above bullet, you can lose money. Investments can decrease in value year over year, and depending on your selling or holding decisions, you can lose money. 

What To Consider When Exchanging One Variable Life Insurance Policy for Another

Changing your life insurance policy may have some benefits, however, there are things that must be taken into consideration. Such factors include:

  • As you age, insurance is likely to get more expensive. However, you may have a very competitive rate if you’ve been with your insurance company since you were younger. 
  • You’ll have to pay surrender charges, which will eat away at your profitability. 
  • Surrendering a policy may trigger tax liabilities. 
  • Do a thorough side by side comparison of the advantages and disadvantages of each policy before making a change. 
  • Be sure not to cancel your existing coverage until your other policy is fully in effect. 

Advantages of Variable Life Insurance

Some of the most sought after advantages are:

  • The possibility of generating a greater than average return when compared against other life insurance options. 
  • Allows you to have more control of your investment options, and you can take a more growth focused, or conservative focused, approach as needed. 
  • The death benefit does not decrease as long as the policy is paid in full and on time each month. 

Disadvantages of Variable Life Insurance

The most talked about disadvantages include:

  • The investment risk associated with having this policy. 
  • There is more complexity in a variable universal life insurance policy, and may require the policyholder to spend more time reviewing it.
  • Surrender charges exist and will erode your profitability if you surrender the policy. 
  • This policy is typically more expensive in comparison to other life insurance policies, considering the numerous fees you’ll have to pay. 

Variable Life Insurance vs. Term Life Insurance 

Variable life insurance allows the policyholder to have more control of what investments their money is being allocated to, and this opens the door to potentially generate greater returns. Variable life insurance is a form of permanent life insurance. 

Term life insurance is in effect for a specific number of years, and does not provide the policyholder with the option to decide what investment vehicles their money is being allocated to. 

Analysis Paralysis 

At times, the insurance and investment world seems overly complex. There are so many investment options to choose from, it can make decision making difficult.

Unless you’re an insurance agent or licensed investment professional, this world may seem foreign to you. Working with a certified financial advisor will help make sense of this complex world. 

Financial advisors make their living providing investment advice to their clients, and it’s their world to fully understand. If you are unsure what investment options are right for you, don’t let the uncertainty prevent you from making a decision.

Working with a professional will guide you to the right focus area.