Variable life insurance combines a death benefit with investment sub-accounts, giving you the potential for higher returns on your cash value — but also exposing you to market risk. It’s the most investment-oriented type of permanent life insurance.
Understanding both the opportunities and risks is essential before choosing this complex product.
Investment Sub-Accounts
Unlike whole life with its guaranteed returns, variable life lets you allocate your cash value among various investment options similar to mutual funds. These typically include stock funds, bond funds, and money market funds.
Your cash value and sometimes your death benefit can fluctuate based on the performance of these investments.
Higher Potential Returns
Over long periods, stock market investments have historically outperformed the guaranteed rates offered by whole life insurance. If your investments perform well, your cash value could grow significantly faster than in a traditional permanent policy.
However, poor market performance can reduce your cash value and may require additional premium payments to keep the policy active.
Who Should Consider Variable Life?
Variable life insurance is best suited for financially sophisticated individuals who want permanent coverage and are comfortable with investment risk. It requires active management and monitoring of your investment allocations.
If you’re not comfortable making investment decisions or prefer guaranteed returns, whole life or universal life may be better options.