What Is a Variable Life Insurance Policy?

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Variable life insurance is one of several types of permanent life insurance that earns cash value, a built-in savings account of sorts that you can borrow from tax-free during your lifetime. But what sets it apart from other types of cash value policies? And is it right for your financial goals?

In this article, we’ll explain variable life insurance and the pros and cons of owning a policy.


When you purchase a variable life insurance policy, you pay an annual premium that covers the death benefit of the policy, plus any administrative costs and fees. Your premium is also reflected in the policy’s cash value. Beyond what you pay into your policy or borrow from it, the cash value can increase or decrease based on the performance of certain market-based accounts like equities, indexes (like the S&P 500), bonds, or money market accounts, determined by your insurer and associated brokerage.


PRO: Policies may have variable premiums, which means you can adjust your premium amount or use cash value to cover premiums.

PRO: Like other types of permanent life insurance, variable policies receive favorable tax treatment.

PRO: For individuals familiar with market-based accounts and a healthy risk appetite, variable life insurance provides another investment avenue while also providing a guaranteed death benefit.

PRO: In years the market performs well, earnings in a variable life insurance policy may outperform other types of permanent life insurance.

CON: Most policies don’t offer any guaranteed rate of return, meaning you could earn nothing or even lose money in the event of a market downturn.

CON: Insurers can put a cap on market earnings.

CON: High administrative and brokerage costs eat into profits.

CON: If cash value is depleted, your policy may lapse, meaning you would lose all premiums paid and no longer have life insurance coverage.


Most people need life insurance coverage. Permanent life insurance policies guarantee a death benefit for your loved ones (term policies only pay out if you pass away within a specified time) while also having the added living benefit of cash value you can access tax-free. Before buying a policy, ask yourself:

How comfortable are you with risk?

Variable life insurance can offer the greatest risk/reward payout, but also charge the highest administrative and brokerage costs. Whole life insurance is the least risky type of permanent life insurance. It offers a guaranteed rate of return, providing steady and predictable growth.

Do you need flexible premiums?

Variable life insurance may be structured with flexible premiums, but universal life insurance also offers flexible premiums without high brokerage costs.

How do you plan to use your cash value?

Whole life insurance is considered an “AND” asset, in that when you borrow from your policy value, you still earn interest on the full cash value, so every dollar can be borrowed and invested at the same time. If you’re looking to fund real estate investments, for a source of business capital, or for emergency cash flow, whole life policies create the most solid financial foundation and wealth building strategy.

At Paradigm Life, our goal is to provide financial education and help you find the best policy for your family and financial goals. Get matched with a Wealth Strategist and schedule your complimentary virtual consultation here.

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