Variable Life Insurance (VLI) Coverage: An Expert Guide (2024)

As your family grows, you might be taking steps to ensure your loved ones will be protected when you’re gone. Life insurance offers your family financial security and peace of mind. But with so many options to choose from, it can be hard to narrow down the one that’s right for you.

If you’re looking for a life insurance option that offers maximum flexibility and control over financial decisions, then you may be interested in variable life insurance. 

What is variable life insurance? Variable life combines death benefit coverage with the opportunity to invest money into the stock market. If you’re curious to see if it’s the option for you, keep reading to learn more about variable life insurance, and how to find the right insurance plan and provider. 

How Variable Life Insurance Works

First, let’s start with the basics—what is the mechanism behind how life insurance work?

Variable life insurance is a policy that allows for greater control over your money as well as the potential for financial growth. 

Your annual or monthly premium payments go into an account that will be used for your investment goals. A small portion is taken out to cover fees, but the rest can be invested into stocks, equity funds, bonds and money market mutual funds. This means the cash value and death benefits may fluctuate according to the market. 

 Some key features include:

• Investment components without a cap
• A cash value account 
• A type of permanent life insurance 
• Tax-free, flexible death benefits

Cash Value

Cash value is an essential component of variable life insurance. So, to understand why it can be beneficial, you may want to know a little more about it. 

Cash value “typically earns interest or other investment gains and grows tax-deferred.” A part of your premium payment goes into your cash value account and with variable life, a part of it goes into investments. But how can you access it? You can access your cash value and use that money to supplement your retirement income or for an emergency.

Here are a few ways you can access it:

• Cancel your coverage so you can “surrender” the policy and get money back
• Borrow your cash value as a loan
• Withdraw fund

Read more: What is cash value in life insurance?

Variable Universal vs Variable Life Insurance

If you’re just starting to explore different insurance policies, it’s easy to mix up variable universal and variable life insurance. Yet, these two policies have significant differences that you may want to be aware of when doing your research. 

Here’s how they compare:

• They both can be risky. Your cash value and death benefits are subject to fluctuation according to the stock market.
• They both allow your cash values to expand on a tax-deferred basis.
  
• Both of these options come with a security investment risk, which means they are both considered a securities contract. So, they are governed under securities laws.
• Variable universal life insurance has more flexible death benefits and premiums. It offers a guaranteed death benefit even if your investments drop in value.
• Variable life offers a guaranteed death benefit but requires higher premiums.
• Variable universal has two death benefits options: fixed and variable.
  

Term vs Permanent Life Insurance

When you’re exploring your life insurance options, there are two major types you’ll encounter: term and whole life/permanent. To understand which may be the best solution for you, let’s break down how they’re different:

• Duration – The major difference is their timeframe. Term life insurance lasts only for a specific time, which can be one to 30 years. Permanent life insurance never expires so it lasts as long as you do.
• Death benefits – In term insurance, the death benefit can either stay the same or drop a little every year during the policy’s term. Plus it only pays a death benefit if you were to pass before the end of the term. Permanent insurance always pays a death benefit.
• Cash value — Permanent insurance offers a cash value that you can use to invest in the stock market. Term insurance doesn’t offer a cash value component.  

The Benefits of Variable Life

The structure of this life insurance policy allows you the most control and flexibility over your insurance and your legacy. The combination of both investment and life insurance compliments means you can expect several benefits including:

• Adjust premiums based on your needs and investment plans
• Control over where your money goes 
• Invest as much as want into the stock market without a limitation
• The chance for a higher return on your insurance policy
• Potential estate tax deductions and other tax benefits

The Drawbacks of Variable Life

When it comes to variable life insurance, there are a few drawbacks and risks to this policy. But, all types of insurance have their pros and their cons. It all depends on what works for you and what you’re comfortable with. 

Some drawbacks include:

• Fees and expenses may be higher than other policies depending on certain factors
• Not a short-term tool for saving money
• The policy may lapse if you don’t maintain a certain cash value
• No guaranteed rate of return since investing in the stock market can significantly raise or lower your death benefits and overall cash value

The Right Insurance Fit

Whenever you’re shopping for an insurance plan, you want to find one that suits your goals and financial plans. So, how do you know if a variable is right for you?

A variable life insurance policy would be a good fit for investors who have a high net worth and would like to continue building their wealth. Since variable insurance can be more expensive than the other policies and involves investing in the stock market, you would need to be someone comfortable with taking risks and able to afford the long-term commitment.  

You have the option for a potentially higher cash value return unlike with other policies. But, if you’re unsure of bundling your life insurance with investing or if you’re unfamiliar with the stock market, it may not be the ideal setup for you. 

When to Get Life Insurance

Most insurance companies would agree that it’s best to get your life insurance policy while you’re still alive. In fact, people are often encouraged to get one as soon as possible even in their twenties. 

While you may not have spent your twenties thinking about life insurance, as you get older, it’ll become increasingly necessary for you to have one to protect your family and your assets. Unsure if you’re ready for or even need a life insurance policy? Well, here are some signs that indicate you may need one:

• You bought a home
• You’re thinking of having children
• You already have a child
• You’re married
• You’re supporting your parents financially
• You have student loan debt
• You job is a bit dangerous or high-risk
• You’re self-employed or work at your family-owned business

Remember that the younger and healthier you are, the cheaper the premiums will be. As you get older, it can get more costly and complicated.

The Types of Permanent Life Insurance

Term and permanent life insurance are two categories that encompass several subcategories of insurance plans. Within the permanent life category, there is

• Variable life insurance
• Variable universal life Insurance
• Whole life insurance
• Universal or adjustable life insurance

Each comes with its own set of benefits and drawbacks. This is why it’s important to do your research and to consult a trusted insurance agent. Once you know what they include, you’ll have an easier time making a decision. 

The policy you choose should fit your life, your budget, and your goals. 

What to Consider

Before you make a significant investment, it’s important to evaluate your situation and what you could be getting into. 

Here’s what you should consider:

• What do you need from your insurance?
• What are your investment objectives and goals?
• Can your budget support fees and expenses that are a part of variable life insurance?
• Is the insurance company you’re looking at financially strong?
• How much insurance do you think you’ll need?
• How long will you need your insurance?

Getting an insurance policy requires a lot of research and thought. With so much information out there, you need a trusted source that can help you understand and narrow down your options.

Case Studies: Examples of Variable Life Insurance in Action

Case Study 1: The Smith Family

The Smith family consists of John, a 35-year-old business owner, and his wife Sarah, a stay-at-home mom. They have two young children. Concerned about the financial security of his family in the event of his untimely death, John decided to explore life insurance options. After careful consideration, he opted for a variable life insurance policy.

With variable life insurance, John could not only provide a death benefit to his beneficiaries but also have the opportunity to invest a portion of his premium payments. This appealed to him as he wanted his life insurance policy to offer both protection and the potential for financial growth.

By investing in a mix of stocks, equity funds, bonds, and money market mutual funds, John aimed to build a cash value that could support his family’s future needs.

Case Study 2: The Rodriguez Couple

Carlos and Maria Rodriguez, both in their early 40s, were looking for a life insurance policy that could accommodate their long-term financial goals. They wanted coverage that would not only provide for their children’s education and mortgage in the event of their passing but also allow them to build wealth over time. After thorough research, they decided to go with variable life insurance.

By choosing variable life insurance, Carlos and Maria were able to take advantage of the investment component of the policy. They allocated a portion of their premium payments toward various investment options based on their risk tolerance and financial objectives.

This gave them the flexibility to adapt their investment strategy over time and potentially generate higher cash value returns. The variable life insurance policy offered them the control they desired in managing their insurance and investment needs.

Case Study 3: The Johnson Family

Sarah Johnson, a 50-year-old executive, wanted to secure a life insurance policy that could provide her with financial protection and the potential for growth. She had accumulated significant assets and wanted to ensure that her family would be well taken care of in her absence. After consulting with a financial advisor, Sarah decided to explore variable life insurance. (For more information, read our “How to Find a Life Insurance Advisor“).

Variable life insurance appealed to Sarah because it allowed her to not only provide a death benefit but also invest a portion of her premium payments. Given her high net worth, Sarah was comfortable with taking on investment risks and had a long-term outlook.

She aimed to maximize her cash value returns by carefully selecting a diversified portfolio of stocks, equity funds, bonds, and money market mutual funds. The variable life insurance policy aligned with Sarah’s financial goals and offered her the control and potential growth she desired.

Compare Your Options

Buying a house or starting a family can be monumental milestones in your life. But, they can also put things in perspective and emphasize the value of life insurance. Variable life insurance can be an ideal solution for those who value control and flexibility when it comes to their legacy and their financial decisions. However, you do have other options. 

Finding the best life insurance plan for you means doing your research so you know exactly what you want and what will work for your life. Use our comparison tool to compare your insurance options and save money while doing so.

You can get a free quote using our one-stop online insurance guide. Enter in your zip code to get started.