Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

Full Bio →

Written by

Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products including home, life, auto, and commercial and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, largely in the insur...

Full Bio →

Reviewed by Leslie Kasperowicz
Farmers CSR for 4 Years Leslie Kasperowicz

UPDATED: Mar 13, 2020

Advertiser Disclosure

It’s all about you. We want to help you make the right coverage choices.

Advertiser Disclosure: We strive to help you make confident life insurance decisions. Comparison shopping should be easy. We are not affiliated with any one life insurance provider and cannot guarantee quotes from any single provider. Our life insurance industry partnerships don’t influence our content. Our opinions are our own. To compare quotes from many different companies please enter your ZIP code on this page to use the free quote tool. The more quotes you compare, the more chances to save.

Editorial Guidelines: We are a free online resource for anyone interested in learning more about life insurance. Our goal is to be an objective, third-party resource for everything life insurance related. We update our site regularly, and all content is reviewed by life insurance experts.

When you think of the word variable, what comes to mind? A musician may remember variations on a theme, while a painter might be reminded of the hundreds of variations of the color white.

With variable life insurance, the explanation is actually less complicated.

Variable life and its partner, variable universal life, simply refer to the fluctuating rates of return and cash value attained through a policy’s investments. Variable may be used by itself as a form of life insurance, or it can be part of a more comprehensive investment portfolio.

We explain the difference between variable life and term life and delve into scenarios where variable life should be considered.

You can also use our FREE online quote tool that can help you find the most suitable life insurance, whether it’s variable or one of many others available.

What is variable life insurance?

Variable life insurance (VLI)  is a type of permanent life insurance that offers lifelong coverage while building the policy’s cash value through investment.

This means that the policy has a defined death benefit payable to the beneficiary, no matter when you die. But it also has a component that, if invested properly, can grow substantially during your lifetime. While it grows, you can also access that growth, or savings portion of the policy, if necessary.

The distinction from other life insurance is what variable implies: both the value and the premiums (fees due) are subject to change.

Unlike whole life, which has guaranteed rates of return, variable life can provide a better opportunity for growth, and this makes it an attractive investment for certain people — especially those willing to pay attention to the policy over a significant period of time.

Variable policies were created in the United States in the 1970s and 80s as an alternative to conventional life insurance. Interest rates had been soaring, and term life policies were stagnant in value, offering no significant growth.

Variable offered a new answer for making life insurance a lifelong investment.

Because it involves a securities portfolio, variable life insurance is regulated and can only be bought from a licensed securities broker. This usually translates into additional fees and commissions that are built into the premiums.

Here are the main features of variable life:

Some important terms to understand include:

  • Investment portfolio: the collective assets of a policy — typically a combination of cash value, plus securities (stocks, bonds, mutual funds).
  • Sub-account: a portion of a portfolio intended for specific purposes, such as a securities investment.
  • Dividends: a distribution of profits paid to investors and added to account’s overall value
  • Guaranteed rate: the predetermined death benefit of a policy, payable regardless of when the insured dies.
  • Variable rate: the death benefit amount paid to the beneficiary from a variable policy; in addition to the guaranteed rate of the policy, the beneficiary will also receive the cash surrender value of the policy at the time of the owner’s death.

How Variable Life Insurance Works

Variable life insurance is a contract between the insurer and the policyholder that contains two key components: a guaranteed death benefit and the cash value of the policy. Variable life can be used as both an investment and a life insurance policy.

The beneficiary of a variable policy receives a predetermined death benefit, plus the account’s cash value when the policyholder dies.

A portion of every variable life policy is invested in selected securities, such as stocks, bonds, or mutual funds. Like all other securities, the investment is managed professionally by a licensed securities broker. The cash value can grow substantially over the policyholder’s lifetime if the markets are favorable and the funds are invested judiciously.

The cash value can also serve as a liquid reserve. For example, the policyholder can access the cash for purposes such as retirement income, a loan for major purchases such as a mortgage, or to use as a reserve to pay future premiums.

The risk of variable life is similar to any investment since there are no guaranteed rates of return.

Variable also involves higher administration fees than most other life insurance options. It’s usually more expensive, especially in the beginning years of the policy.

Dividends are paid to the policyholder’s account when investments perform favorably, so the account can grow a lot throughout a lifetime.  Unlike term life, which only pays a death benefit, variable life has significant potential for additional value.

Many financial advisors advocate for variable life insurance as a tax-advantaged investment. Generally, any income generated is tax-deferred, meaning that it’s not taxed by the federal government until it’s withdrawn. You can also take loans from the policy value without paying federal income tax.

Think of the variable life portfolio as similar to a mutual fund. The owner is presented with a prospectus, which outlines where the funds are invested. And because the investments are regulated by the SEC, it can only be sold by a licensed broker.

This protects the investor, but it also limits their ability to choose exactly where their policy is invested.

Generally, there are two approaches to an investor’s overall portfolio:

  • A conservative strategy, which typically has lower returns, but is safer.
  • An aggressive strategy,  which takes higher risks, but can offer higher resulting returns.

One of the most important issues to address before committing to any type of variable policy is how the death benefit will be affected throughout the course of the policy. After all, the purpose of any kind of life insurance is to provide the all-important death benefit. Depending on how the policy is written, the death benefit may be able to grow, just as the cash value grows over time.

However, the death benefit can also be reduced if premiums aren’t paid on time, and the result is a lapsed policy. You need to pay attention to the account standing regularly.

Cash Value/Surrender Value

Cash value refers to the accumulated worth of the policy — the interest and dividends earned. Surrender value is calculated when you cancel or when the owner dies.

The difference between them is important to understand, because the surrender value may be much lower than the cash value after fees and other variables. This is because the insurer has the right to withdraw administration fees before the policy is paid out to you.

Surrender fees may be high, especially during the early phase of the policy, when administrative and commission fees tend to be much higher.

To complicate the equation further, if the policy’s cash value has been used at some point as collateral for another loan, the death benefit may be reduced or even eliminated to satisfy the loan terms first.

This can have a bad effect on the policyholder’s family. Because of this, many advisors recommend having additional life insurance to cover this scenario.

Another point to keep in mind is that both variable and variable universal life insurance are bought for the all-important death benefit. Depending on how the policy is written, the death benefit may be able to grow, just as the cash value grows over time.

However, the death benefit can also be reduced if premiums aren’t paid on time, and the result is a lapsed policy. You need to pay attention to the account standing regularly.– Tax Implications of Surrendering Early

The tax effects of early surrender are relatively straightforward, but you need to consider them seriously. You aren’t taxed on the value of the premiums you’ve already paid into the policy, but anything more than that amount, including dividends and interest, are taxed as ordinary income.

You should consider the repercussions of early withdrawal. Buying a replacement life insurance policy might result in much higher premiums because of your advancing age or certain health issues that may now be present.

To some people, an attractive feature of variable life is the ability to use the cash value to pay premiums. However, most advisors don’t recommend this since it requires paying close attention to making sure the cash value doesn’t dip below a threshold, putting the policy in jeopardy.

Variable life insurance is most attractive to those willing to assert its investment power in overall portfolio growth. While it’s more expensive than traditional life, it’s mostly due to initial costs, such as administration fees and broker commissions.

If you’re willing to pay attention to the fund management (choosing certain ethically-minded investments, for example), variable life could be considered a socially responsible option in a person’s portfolio.

Most advisors tell their clients to use variable life only as a portion of their portfolio since diversification usually means a higher return on investment.

Paying attention to the variations in a death benefit is also important. An untimely death could be catastrophic to beneficiaries if the variable account’s death benefit has been reduced.

A drawback to variable and universal variable is that most people find it unrealistic to pay the regular, close attention that is required of variable policies. A policy owner without the time or investment knowledge may cringe at the prospect of trying to manage its complexities.

So while the investment component is attractive, the fees and various tax implications may be too daunting. Add a volatile market into the equation, and variable life may simply be more risky than beneficial.

Who Should Consider Variable Life Insurance

Variable life insurance and its cousin, variable universal life, are not for everyone, especially those unfamiliar with the many investment pitfalls that can happen in unfavorable market trends.

However, there are many out there who successfully use variable’s tax advantages and growth opportunities. We’ve identified a few groups that should take a good look at variable options.


As an instrument of long-term growth with substantial tax benefits, variable life offers plenty of potential, although owners do have a limited choice in where their money can be invested. However, paying attention to the general market health is essential.

Young Couples

Variable offers growth for young couples looking for death-benefit coverage, combined with an opportunity for long-term growth. They should be willing, however, to commit to a lengthy investment for the policy to appreciate substantially.

They should also be prepared to handle higher upfront costs than the more affordable term life insurance usually recommended to them.

Recent Retirees

People at or near retirement who have additional investments (such as a mortgage) may need additional income protection. If necessary, and if the cash value of the policy has appreciated enough, they may able to use variable life policies for tax-free income.

They may also borrow from their policy, but they need to pay attention to prevent the policy from lapsing. This could happen if there isn’t enough cash value to cover ongoing premiums that are automatically being deducted.

Business Owners

Business owners may use variable life as a safeguard to cover the loss of key employees, such as a business partner. If a partner should die prematurely, a variable or universal policy can provide a death benefit, plus the cash value to the remaining owner.

When to Consider Variable Life Insurance

The menu of life insurance available is generous but complicated. Variable life and variable universal life insurance might be compared to an appetizer: it’s available, but not necessarily within one’s appetite or budget.

First, you should consider variable’s investment potential. While it can grow over the policyholder’s lifetime, its up-front costs are usually much higher than term and whole life. If it’s part of a larger portfolio, and if the policyholder can benefit from its tax-deferred gains status, it’s worth the look.

Second, if flexibility is important — both in premiums and the value of death benefits — variable provides many possibilities and tax benefits for those who can afford the initial costs.

Lastly, comparison to other types of life insurance should be discussed with a reputable advisor who is familiar with your particular wealth goals and opinion on life insurance as an investment.


As part of retirement planning, variable life and variable universal life provide the opportunity for portfolio diversification.

If markets perform as well as most historical models demonstrate, then variable life may provide a good rate of return for retirement planning purposes.

Variable and variable universal life can be combined with other life insurance products.

As long as the policy is in good standing, variable life provides the incentive of tax-deferred income and tax-free borrowing.

You can participate in ethical or belief-based investment.

Part of a Sound Financial Plan

Variable life can be used in combination with other long-term investments.

It can also be tapped into for the unexpected, such as drastic income loss or a new mortgage.

It builds cash value, unlike term life, which only pays out a set amount at the time of death.

Alternatives to Variable Life Insurance

There are many alternatives to variable life insurance that also allow your investment and premiums to provide protection,  such as:

Annuities, which provide a steady flow of income from your existing savings

Other tax-advantaged retirement products with higher returns, such as 401(k) and SIMPLE plans.

Compare Quotes From Top Companies and Save

secured lock Secured with SHA-256 Encryption

Variable Universal Life Insurance

Variable universal life is a hybrid of variable and universal life insurance. This means that, like variable life, it has both a death benefit and an investment component, which allows the policy value to grow. Like standard universal life, it allows for premium and death benefit fluctuations.

How Variable Universal Life (VUL) Works

Because it provides even more room for higher returns than traditional variable life, VUL is attractive to some people willing to take a higher risk. A good way to understand the difference is to compare variable universal life to a mutual fund. It has the opportunity to grow, but it also opens up risk for loss.

In the case of loss, it would be up to the policyholder to pay higher premiums, because the insurer deducts its fees from the policy’s cash value, regardless of how well (or poorly) the account performs. This can also create the risk of a policy lapse.

Dividends paid to the policy value fluctuate depending on market performance.

Tax advantages to VUL, though, are similar to traditional variable life, making it attractive for tax-deferred income.

Similarly, owners can leverage the policy for other uses, such as a new mortgage or unexpected medical costs.

Shopping for Variable Life Insurance

Because variable life and VUL insurance policies involve a prospectus and require the involvement of a licensed securities broker, policies are most often purchased through larger insurers with credentialed staff. Many small- to mid-sized insurance companies don’t offer variable directly.

Top Sellers provides a comprehensive guide for what to look for and expect when purchasing variable life. Keep in mind that the broker involvement almost always translates into higher upfront administrative and commission fees. Throughout a policy’s lifetime, account maintenance fees are also higher than term insurance, since they involve regulation.

A few top sellers of variable and variable universal life include:

  • New York Life
  • Brighthouse
  • Pacific Life

Insurance companies that offer VL and VUL entice consumers with keywords such as growth, flexibility and tax incentives. Policies require underwriting, so you can expect considerable differences when you research different rates.

How much coverage do I need?

The amount a family or person requires for coverage depends on factors such as age, family size, income, and budget. There are plenty of insurance calculators available that may sway the buyer needlessly toward a certain product, but the Insurance Information Institute provides an unbiased and comprehensive guide.


  • Goals: is life insurance your only planned legacy?
  • Life scenarios: your age, your family’s size, your income
  • Purpose: wealth protection, tax advantages or an inheritance
  • Cost and comparison

Canceling Your Policy

Remember that the accrued cash value and the surrender value (after fees, commissions, and penalty fees) are different. As always, before canceling any life insurance policy, you need to have an alternate life insurance plan in place.


Voluntary surrender may take place if the policy is no longer needed, or one wishes to use it for another purpose, such as a major life change, or a change in beneficiary. Research how to determine the surrender value before deciding if this is a good option.

Remember, the surrender fee is designed by insurers to ensure coverage of their administrative costs. Newer policies have a higher surrender fee, while most older policies are reduced by a percentage each year, typically after eight or more years. Many contracts will also allow you to withdraw a certain amount annually, without penalty.

To cancel, you must contact the insurer. You must also be aware that you are required to file income gains or losses with the federal government (and some states) once you surrender.


When someone can no longer pay the premium on a variable life insurance policy that has a cash value, the death benefit may be reduced or eliminated, which can have major consequences to a family in the event of unexpected death. Fortunately, by working with the life insurance company, there may be alternatives to simply losing the death benefit entirely.

For example, unlike term insurance, in which the policy lapses entirely with non-payment of premiums, variable still has a cash value that can be changed into:

  • Cash surrender value (death benefits will be null, however)
  • A new policy, reinstated, but subject to a new medical exam
  • Non-forfeiture option, which modifies the policy into a reduced death benefit, but you must forfeit the existing cash value

This brings up the importance of paying attention to your policy’s value throughout its lifetime. It is harmful financially to have a lapsed policy due to non-payment of premiums.

Transferring Your Policy

At any point, you can transfer the ownership of a policy to another person. You would no longer be responsible for payment of premiums, but you would lose the policy as an asset (and a continued form of investment).

Usually, a policy is transferred for tax savings reasons, such as to avoid capital gains. However, IRS tax code requires that a new life insurance policy takes its place, which may end up being more expensive overall. The advantage of a transfer is usually limited to people with considerable wealth.

Because variable and variable universal life insurance involve securities, a transfer must involve a licensed broker or advisor, which may needlessly add to the transfer’s expense.

Compare Quotes From Top Companies and Save

secured lock Secured with SHA-256 Encryption

Pros & Cons

To summarize, here is a list of pros and cons for both traditional variable and variable universal life insurance.

Traditional Variable

First, the pros.


  • Tax-deferred income
  • Potential for higher return than whole life
  • Permanent life insurance (does not expire)
  • Death benefit can be increased as cash value grows
  • Can borrow or withdraw from the cash value
  • May be used to supplement retirement and other
  • Deposit accounts
  • Guaranteed death benefit


  • Riskier than whole life
  • Lower interest than other long term investments
  • Higher premiums than term life
  • Borrowing lowers the death benefit
  • Management and investment fees may affect cash value
  • May not have guaranteed rate of return, or it may be low
  • Cash value often isn’t equal to surrender value for 10 – 15 years
  • Regulated investments can translate into higher hidden fees
  • Poor performance may lower the death benefit
  • Fewer investment choices offered than variable universal

Variable Universal

First up are the pros.


  • Tax-deferred income
  • Potential for higher return
  • Can borrow or withdraw from cash value
  • More investment possibilities than traditional variable
  • Can voluntarily fund the account early to build the cash value
  • Can use the cash value to pay premiums
  • May be used to supplement retirement and other deposit accounts
  • Flexible premiums and death benefits
  • Governed by securities law
  • Combines life insurance with income growth


  • Lower interest than many long term investments
  • Difficult to manage investments
  • More risky than whole life and traditional variable
  • Subject to fluctuations in value based on market volatility
  • Higher premiums than term life
  • Borrowing lowers the death benefit
  • Higher premiums when investments are not performing
  • High surrender fees

As indicated, both traditional variable life and variable universal life offer substantially more growth potential than standard whole life (a fixed rate), and term life (no cash value other than the death benefit). Variable universal contains more risk, but like any other securities investment, it also has a better chance for a higher rate of return.

Both variations are good candidates for people with diverse portfolios, but they should be prepared to pay higher premiums and fees and pay attention to the fluctuations of the account’s cash value.

The Bottom Line

Variable life insurance deserves attention as an investment vehicle for people who can contribute to its growth, and the savvy to pay attention to the details (such as commissions, increasing premiums, etc.). It’s an attractive addition to a diversified investment portfolio, and it also offers a higher rate of return than most other life insurance types.

The ability to withdraw funds in the future for expenses anticipated (retirement) or unplanned (a major change in life) adds the element of safety. Unlike term life, which offers no appreciation, variable life insurance invested well can be put to work during a person’s lifetime, while still ensuring death benefit protection.

If you have the patience or wherewithal for analyzing your personal finances, then variable can be treated as an investment opportunity. The caveat is that it is best for those who are willing to see it grow over a substantial period of time.

Finding the best policy is the next challenge since variable products differ between insurance companies — as do their fees and flexibility.

Remember, because variable life involves securities and regulations, commission fees and annual maintenance fees may be significant. It is also advisable to discuss with a financial advisor what tax implications may occur throughout the policy’s lifetime.

To find out if variable life is for you, start comparison shopping now, by using our FREE online tool below.