A Guide to Variable Life Insurance

Variable life insurance is a type of “permanent” life insurance that also accommodates an investment account. Prior to a point in time during the 1980s variable life insurance referred to a variable whole life policy. Those old variable whole life policies gained the reputation of being the most expensive life insurance money could buy and they have since fallen out of favor and out of the marketplace as far as we know. Today, the name, variable life insurance, is most likely referencing variable universal life insurance, a life insurance product that was born during the high-interest rates of the 1980s when the allure of putting money in the market was something many life insurance consumers couldn’t resist. In this article, when we mention variable life insurance, we too will be referencing what is technically variable universal life insurance. Here’s what everyone should know about variable life insurance. 

  • Definition and Evolution: Variable life insurance, initially known as variable whole life insurance, has evolved into variable universal life insurance (VUL), combining permanent life coverage with an investment component.
  • Features and Functionality: VUL policies provide a death benefit and the potential for cash value accumulation, distinguishing themselves by enabling investment in variable accounts tied to stocks and bonds.
  • Mechanics of Variable Life Insurance: Premium payments in VUL contribute to savings and sub accounts connected to the stock market, offering policyholders a degree of control over investment allocation.
  • Advantages and Disadvantages: Noteworthy advantages of VUL include control over investments, high growth potential, and flexibility in premiums. Conversely, disadvantages encompass the risk of cash value losses, potential premium increases, and the presence of high fees.
  • Issues and Alternatives: Variable life insurance presents challenges such as substantial fees, potential lack of true permanence, and often underperformance. Alternatives involve considering whole life insurance, leveraging cash values for personal investments, or combining term insurance with separate investment strategies.

What Is Variable Life Insurance?

Variable life insurance, also known as variable universal life insurance (VUL), is a policy similar to other universal life insurance policies in that it’s a “permanent” plan including a death benefit with the potential to accumulate cash value. VUL policies also have flexible premiums, like other universal life policies. The main difference is that VUL policies allow you to put some or even all of the cash value in your policy into variable accounts of investment funds, such as stocks and bonds. Many people are drawn to this policy because they’re able to carry a death benefit and invest. 

These sub accounts are where the policy gets its name. Because these accounts are tied to the market, there’s variation in what returns you may get. The market is always fluctuating, and with that fluctuation, your policy will be affected. Sometimes the market performs well, and you can get significant returns. But when the market doesn’t perform, you can suffer substantial losses. 

How Variable Life Insurance Works

When you buy a variable life insurance policy, you pay a premium, and the premium goes toward the savings component of the policy. From there, a determined chunk of that premium will go toward your sub accounts that are tied to the stock market. The insurance provider will also deduct the cost of the death benefit and administrative fees from the premium you paid. 

Each of the sub accounts is structured similarly to a family of mutual funds. There’s often an array of stocks and bonds with a money market option as well. The insurers for this type of policy have to be certified or hold a securities license because the policy delves into the stock market so much. The insurer often determines where the cash value is placed, but you do retain some control of how your cash value is invested. 

Advantages and Disadvantages of Variable Universal Life Insurance


  1. Control over investments in cash value
  2. High potential for growth
  3. Flexible premiums


  1. Risk of losses in cash value
  2. Potential increase in premiums
  3. High fees and charges

How Much Does Variable Life Insurance Cost?

Because variable life insurance is categorized as a permanent type of life insurance, it naturally costs more than a standard term life insurance policy would. VUL policies typically cost 5 to 10 times more than term life with no guaranteed return. Additionally, variable life insurance often isn’t even permanent life insurance unless you pay an extra fee to make it so. This means your premiums might continue to increase over time, costing you more and more each year.

Is Variable Universal Life Insurance (VUL) a Wise Investment?

While VUL may enhance returns within the policy during bullish markets as an insurance product, it falls short of matching the performance of direct market investments when considered as a standalone investment. The associated fees and insurance costs can negatively impact the overall return.

What Is The Difference Between Variable Life Insurance and Whole Life Life Insurance?

A variable life insurance policy is different from a whole life policy, even though they are both classified as permanent life insurance. These are some of the key differences between the two types of policies:

  • Variable life insurance policies have a flexible premium while whole life has a fixed premium. You or the insurance company can adjust the premiums even after the policy is purchased. 
  • Variable life insurance policies are tied to the stock market with variable returns depending on how the market performs while whole life has a guaranteed cash value accumulation through equity. 
  • The sub accounts in a variable life insurance policy are separate accounts. The cash value in these accounts is just cash. It is not equity, like cash value in whole life insurance policies. 

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While whole life and variable life insurance are both classified as permanent insurance, there are key differences in how they accumulate cash value. The key difference between these two is that VUL policies are variable while whole life policies are guaranteed. 

The Problems with Variable Life Insurance

Variable life insurance was designed to combine flexible premiums, a death benefit, and the opportunity to invest. But in practice, this insurance has some key problems that are important to understand: 

  • Variable life insurance has enormous amounts of fees. While a whole life policy often has a flat fee often around $100 give or take, VUL fees can be extensive. Often 6% of your premium payments go to the insurance company initially. Then each sub account has a fee associated with it that is also deducted from your cash value. Finally, there’s the flat policy fee every life insurance policy has. When all of these fees are added up, it’s unusual to see fees less than $250 but easily greater than this amount. And these fees come from your cash value, which then hinders how much you’re able to gain from your investments. 
  • Variable life insurance isn’t truly permanent life insurance. Though VUL is categorized as “permanent”, that’s not necessarily accurate. Variable life insurance includes term insurance to provide a death benefit unless you pay an additional fee to make a variable life insurance policy truly permanent. If you don’t pay the fee to make it permanent, you’re faced with increasing premiums as the term insurance costs increase because term life insurance premiums always increase as you age.  The increasing cost of insurance will be taken from your variable life insurance cash values. If the market growth on your policy cash values has not outpaced the rising cost of insurance that’s when tragedy can strike.  The insurance company will bill you for the increasing premiums and those premiums most often exceed the budget of any policy owner.  Even if the policy owner wants to keep their life insurance coverage active it is often financially unfeasible and the policy terminates after consuming all of its cash value. 
  • Variable life insurance very often doesn’t perform. When your cash value is tied to a fluctuating market, you very often get little in return. Your subaccounts may do well as the market does well, but you can still end up paying more in premiums and fees than you gain from your subaccounts. After 20–25 years of your policy, you might find yourself with no cash value, even after all the premiums and fees you paid over the decades. This can be detrimental if you were using your policy to save for retirement. By the time you are ready for retirement, your policy might have no cash value. 
  • Variable life insurance transfers the insurance risk back to the owner. Usually, you choose to take out an insurance policy to reduce some of the risks of owning property or potentially dying. But when you choose variable life insurance, you’re not transferring all of that risk onto the insurance company. With VUL the insurance companies can legally transfer the risk back to you. That’s why these policies are appealing to insurers and are still sold today. With whole life insurance, the insurance company carries your risk instead. 

Alternatives to Variable Life Insurance

With all the risks associated with variable life insurance, choosing this type of policy is most often a poor investment. But VUL insurance isn’t the only option. Here are some alternative options to variable universal life: 

  • Choose a whole life policy. If you’re looking for permanent life insurance, whole life provides guarantees without risk. You’ll accumulate cash value guaranteed and still have a death benefit at any point should you need it. You’ll also be able to use the cash value during your lifetime. 
  • Leverage whole life insurance cash values to invest in the stock market. Some people take their whole life insurance cash values to invest in the stock market on their own. VUL policies have many fees that you can bypass if you do your own investing. 
  • Invest and buy term insurance. If you do need some life insurance coverage but don’t want permanent coverage, you can buy term insurance and invest instead. We don’t recommend this strategy because of the long-term risks that aren’t covered, but if someone is inclined to use this highly promoted financial plan, we recommend that they buy convertible term insurance. This way they can convert it to permanent whole life if they need to carry insurance longer than they thought they would. The “buy term and invest the difference” strategy isn’t as fruitful in the long run as a whole life policy, but it’s still more financially secure than VUL insurance. 

The Bottom Line

If you’re unsure about what type of life insurance is best for you, we offer appointments to help people understand what is available and provide recommendations based on a person’s financial situation and financial goals.  We design and sell life insurance that helps people keep more of the money they make, grow their wealth, and have financial peace of mind. Schedule a personal appointment here.

Ben McFieBen T. McFie

There's a lot of confusion around finance; there's so much to know and it's frustrating when you don't know enough to make the best financial decisions. I like to bring clarity to financial matters so people can make good financial decisions that will help them live wealthier more fulfilling lives.

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