10 Things You Should Know About Variable Life Insurance

Variable Life Insurance Variable life insurance is a complex product that can be confusing at times. Today we're going to work through some of the main things that you should know about variable life.

Variable life is a variation of whole life insurance. Both variable and whole life are types of permanent life insurance policies. The main difference between variable and whole life insurance is in the way the cash value of the policy is handled. With variable life you have more control over how the cash value is invested. I'll explain this more later in the article.

HERE ARE 10 THINGS YOU SHOULD KNOW ABOUT VARIABLE LIFE INSURANCE

It’s permanent.
Variable life will not expire unless you cancel the policy or you stop paying the premiums. Since the policy stays in effect until you pass away, the life insurance company knows that they will eventually have to pay out money. This makes variable life more expensive than term life insurance.
It has an investment (savings) account built in.
This is called the cash value of the policy. Part of the insurance premiums that you pay will go into investments. These investments grow as part of your policy and are considered a tax deferred investment. This means that your policy savings will grow tax free like an IRA (RRSP in Canada) until you withdraw the funds.
You have control over the investments.
This is the main difference between whole life and variable life insurance. With whole life insurance, your savings has a guaranteed return which is usually relatively low. With variable life, you have a range of options for investing your savings. These options usually include savings accounts, guaranteed term deposits, and investment funds (which are similar to mutual funds).
With more investment options comes more potential risk.
While I think that funds that invest in stocks are generally quite safe when you take a long term view of investing, there is still more risk involved compared to guaranteed investments. More risk usually means better returns. But if you don’t like any risk with your investments, then you need to make sure you pick low risk investment options.
There are 3 ways to access the savings in your policy.
Remember that since your money grows tax free in a life insurance policy, you will probably have to pay taxes if you take any of the savings out.
- By making a partial withdrawal.
- By borrowing your own money - You can borrow your own savings in the form of a loan and you will be charged interest until the money is repaid.
- Cancelling the policy - If you cancel your variable life insurance policy, you should receive the value of the savings in the policy (less any applicable taxes and fees).
Withdrawing money from your policy may reduce your coverage.
The amount of money paid out to the beneficiary of your policy may be reduced if you withdraw money from your policy. Every policy is different. You would need to check the terms of your policy or ask your insurance company or agent to be sure.
The savings in the policy might disappear when you pass away.
Since the terms of each policy are often different, you would need to check on this by reading your policy or talking to your insurance company. With whole life insurance, the savings in your policy is almost always kept by the insurance company when you pass away. But with variable life insurance, you may have the option to have both the life insurance and the savings paid out when you pass away.

This is another good reason to buy term life insurance and keep your investments separate from your life insurance. If your investments are separate, you can be sure that they will go to your family when you pass away. Wouldn’t you rather have your savings go to your family instead of your insurance company’s bank account?
As long as you have some savings in your policy, you can choose not to pay any premiums.
If you have money in the savings portion of your policy, the insurance company can take the premiums out of your savings. This can continue until the savings is gone.
Variable life has high fees and administration costs.
Companies and agents make good money by selling variable life policies and they’re making that money from the high premiums that you have to pay. Save yourself some money and buy a low cost term life insurance policy instead.
You can use it for estate planning.
Since variable life insurance is permanent, you can buy a policy to make sure that money is available for estate taxes. Your family can use the proceeds of the life insurance policy to pay the estate taxes.

As an alternative, you could buy a cheaper term insurance policy and start investing money separately. If you stay disciplined with your investing, you can build up enough savings to be self insured. You can cancel your term life insurance or let it expire and save yourself having to pay life insurance premiums for your entire life. When you pass away, the savings can be used to pay any estate taxes.

I invite you to learn more about life insurance by checking out the related articles listed below. Or you can see our full listing of life insurance articles.

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