Variable Life Insurance: Is It Worth the Cost?

Variable Life Insurance (VLI) is a type of permanent life insurance that combines death benefit protection with the ability to invest cash value in subaccounts similar to mutual funds. Unlike traditional whole life insurance with fixed cash value growth, VLI allows policyholders to potentially earn higher returns, but with investment risk.

This guide examines how variable life insurance works, its costs, benefits, risks, and strategies to help you decide if it’s worth the investment for your long-term financial goals.

What is Variable Life Insurance?

Variable life insurance is permanent insurance that offers:

1. Death Benefit Protection – A guaranteed minimum death benefit for beneficiaries.
2. Cash Value Component – Can be invested in stocks, bonds, or mutual fund-like subaccounts.
3. Flexible Premium Allocation – Policyholders decide how much goes to COI (cost of insurance) versus investments.

Unlike term life insurance, which only provides a death benefit, VLI combines insurance protection with potential investment growth, giving it a dual purpose.

How Variable Life Insurance Works

VLI works by splitting your premium into two main parts:

• Cost of Insurance (COI) – Covers the death benefit and policy expenses.
• Investment Allocation – Remaining premium goes into subaccounts chosen by the policyholder.

Investment Options

Policyholders can select from various subaccounts:

• Equity Funds – Higher potential growth but higher risk
• Bond Funds – Moderate risk and returns
• Balanced Funds – Mix of equities and bonds for diversification
• Money Market Funds – Low risk, minimal growth

Performance and Risk

• Cash value growth depends on investment performance
• Poor market performance can reduce cash value
• Death benefit may be affected if cash value drops below required COI coverage

Benefits of Variable Life Insurance

1. Potential for Higher Returns

   • Investment component allows cash value to grow faster than traditional whole life policies.

2. Flexible Investment Choices

   • Policyholders can adjust allocations based on risk tolerance and market conditions.

3. Permanent Coverage

   • Lifelong protection as long as premiums are paid and cash value covers COI.

4. Tax Advantages

   • Cash value grows tax-deferred
   • Death benefit is generally tax-free to beneficiaries

5. Financial Planning Tool

   • Can supplement retirement or serve as an investment vehicle alongside death benefit protection

Costs of Variable Life Insurance

VLI tends to be more expensive than term or traditional whole life insurance due to:

• COI – Increases with age and coverage amount
• Policy Fees – Administrative charges, fund management fees, and insurance company expenses
• Investment Risks – Poor performance may require additional premiums to maintain death benefit

Managing Costs

• Choose coverage amounts aligned with financial needs
• Start investing gradually in subaccounts
• Monitor performance and adjust allocations as needed
• Consider using term life in combination with VLI for short-term coverage

Risks and Considerations

1. Market Risk

   • Cash value depends on investment performance; losses can reduce policy value.

2. Complexity

   • VLI requires understanding investments, policy mechanics, and fees.

3. Premium Requirements

   • Low cash value or poor investment returns may necessitate higher premiums to maintain death benefit.

4. Long-Term Commitment

   • Best suited for policyholders with long-term investment horizons.

Death Benefit Options

VLI policies typically offer two options:

• Level Death Benefit – Fixed death benefit equal to policy face value
• Increasing Death Benefit – Death benefit equals face value plus cash value accumulation

The choice affects premiums, investment growth potential, and long-term strategy.

Riders and Policy Enhancements

Common riders can enhance VLI coverage:

• Accelerated Death Benefit – Access portion of death benefit if terminally ill
• Waiver of Premium – Premiums waived if policyholder becomes disabled
• Long-Term Care Rider – Use policy funds for care needs
• Child Term Rider – Coverage for children

Riders increase flexibility but may add to policy costs.

Determining If Variable Life Insurance is Right for You

VLI is suitable for individuals who:

• Have a long-term investment horizon
• Can tolerate market risk in their cash value
• Want permanent life insurance with growth potential
• Are comfortable actively managing investments within the policy

VLI may not be ideal for those who:

• Prefer low-cost, straightforward coverage (term life may suffice)
• Are risk-averse or inexperienced with investments
• Need short-term coverage only

Comparing Variable Life Insurance with Other Policies

Real-Life Scenarios

Scenario 1: Young Professional Investor

• Emma, 28, purchases VLI with a strong equity allocation
• Cash value growth supplements retirement savings
• Provides lifelong coverage while leveraging market growth

Scenario 2: Mid-Career Family

• John, 45, uses VLI to cover mortgage and children’s education
• Diversified investment allocation balances risk and growth
• Policy review ensures death benefit and cash value remain sufficient

Scenario 3: Estate Planning

• Robert, 60, selects VLI with increasing death benefit
• Cash value growth helps fund estate planning goals
• Flexible death benefit ensures heirs receive desired amount

Tips for Maximizing Value

1. Start Early

   • Cash value has more time to grow and compound.

2. Diversify Subaccounts

   • Mix equities, bonds, and balanced funds to manage risk.

3. Monitor Policy Regularly

   • Adjust allocations based on market conditions and personal goals.

4. Use Policy Loans Strategically

   • Borrow against cash value if needed, but consider impact on death benefit.

5. Consult a Financial Advisor

   • Ensures alignment with long-term financial and investment goals.

Common Misconceptions

• “VLI guarantees high returns” – Returns depend on market performance and are not guaranteed
• “Cash value cannot decrease” – Poor investment performance can reduce cash value and require extra premiums
• “VLI is too expensive for most people” – While premiums are higher, long-term benefits can justify the cost for some
• “Investment management is hands-off” – Policyholders must actively monitor subaccounts and allocation

Conclusion

Variable life insurance offers permanent coverage with potential cash value growth, making it a valuable financial tool for individuals with a long-term investment horizon and risk tolerance. While it comes with higher costs and investment risks, proper planning, diversification, and ongoing policy management can make VLI a strategic choice for:

• Retirement supplement
• Estate planning
• Legacy building
• Lifelong financial protection

By understanding policy mechanics, investment options, costs, and risks, you can determine if variable life insurance aligns with your financial goals and risk profile, and whether the potential benefits outweigh the cost.