Variable Life Insurance
Variable life insurance (VL) is a form of permanent life insurance with fixed premiums but a variable cash value and death benefit based on investment performance.
What Is Variable Life Insurance?
Variable life insurance combines permanent death protection with an investment component. The policy owner chooses how the cash value is invested among various subaccounts, and both the cash value and death benefit fluctuate based on investment performance.
Key Characteristics
1. Fixed Premiums
Unlike universal life, variable life has fixed, level premiums:
| Feature | Variable Life | Variable Universal Life |
|---|---|---|
| Premium amount | Fixed | Flexible |
| Premium schedule | Required | Flexible |
| If premium missed | Policy may lapse | Cash value covers if sufficient |
Variable life premiums are set at issue and remain level throughout the policy's life, similar to whole life insurance.
2. Variable Death Benefit
The death benefit in a variable life policy fluctuates based on investment performance:
| Component | Description |
|---|---|
| Minimum guaranteed death benefit | Floor that cannot be reduced regardless of performance |
| Variable portion | Additional death benefit based on positive investment performance |
How it works:
- If investments perform well → death benefit increases
- If investments perform poorly → death benefit decreases
- Death benefit never falls below the guaranteed minimum
Example
| Scenario | Minimum Guarantee | Variable Portion | Total Death Benefit |
|---|---|---|---|
| Good performance | $200,000 | $75,000 | $275,000 |
| Poor performance | $200,000 | $0 | $200,000 (minimum) |
Exam Tip: Variable life guarantees a MINIMUM death benefit. Even if investments lose value, the death benefit won't fall below this floor.
3. Cash Value Tied to Investment Performance
The cash value is invested in subaccounts chosen by the policy owner:
| Feature | Description |
|---|---|
| Investment control | Policy owner selects subaccounts |
| Performance varies | Cash value rises and falls with markets |
| No floor | Cash value can go to zero |
| Tax-deferred growth | No current taxation on gains |
Cash Value Risk
Unlike the death benefit, there is no minimum guarantee for cash value:
- Cash value can decline to zero if investments perform poorly
- Policy owner bears full investment risk on cash value
- Poor performance can erode the entire cash value
Investment Options (Subaccounts)
Policy owners typically have access to a variety of subaccounts:
Common Subaccount Categories
| Category | Description | Risk Level |
|---|---|---|
| Fixed account | Guaranteed interest (not variable) | Low |
| Money market | Short-term, stable value | Low |
| Bond funds | Government and corporate debt | Low-moderate |
| Balanced funds | Mix of stocks and bonds | Moderate |
| Growth funds | Large-cap growth stocks | Moderate-high |
| Aggressive growth | Small-cap, sector funds | High |
| International | Foreign securities | High |
Subaccount Features
- Each subaccount has its own investment objective and strategy
- Policy owners can allocate among multiple subaccounts
- Most policies allow periodic reallocation (monthly, quarterly)
- Each subaccount charges management fees
How Variable Life Works
Premium Flow
| Step | Action |
|---|---|
| 1 | Fixed premium paid |
| 2 | Insurer deducts mortality and expense charges |
| 3 | Net premium allocated to subaccounts per owner's instructions |
| 4 | Cash value fluctuates with subaccount performance |
Monthly Deductions
Each month, the insurer deducts:
- Mortality charge (cost of insurance)
- Expense charges (administrative costs)
- Subaccount management fees (investment costs)
If the cash value declines significantly, these deductions can accelerate the decline.
Advantages of Variable Life
| Advantage | Description |
|---|---|
| Growth potential | Cash value can grow significantly in strong markets |
| Investment control | Policy owner chooses investment allocation |
| Tax-deferred growth | No current taxation on investment gains |
| Minimum death benefit | Guaranteed floor protects beneficiaries |
| Fixed premiums | Predictable premium payments |
Disadvantages of Variable Life
| Disadvantage | Description |
|---|---|
| Investment risk | Cash value can decline or be lost entirely |
| No cash value guarantee | Unlike whole life, no minimum cash value |
| Complexity | More difficult to understand |
| Higher costs | Subaccount fees add to overall expenses |
| Fixed premiums | Less flexibility than VUL |
| Requires securities license | Limited pool of agents can sell |
Variable Life vs. Whole Life
| Feature | Whole Life | Variable Life |
|---|---|---|
| Premium | Fixed | Fixed |
| Cash value guarantee | Yes | No |
| Death benefit guarantee | Yes (full) | Yes (minimum only) |
| Investment risk | Insurer bears | Policy owner bears |
| Growth potential | Limited | Unlimited |
| Regulation | State only | State + federal |
Key Takeaways
- Variable life has fixed premiums like whole life
- The death benefit fluctuates but has a guaranteed minimum
- Cash value has no minimum—it can decline to zero
- Policy owners choose subaccounts for their investment allocation
- Offers greater growth potential but also greater risk
- Regulated as both insurance and securities
The death benefit in a variable life insurance policy:
Unlike the death benefit, the cash value in a variable life policy:
Variable life insurance has premiums that are:
8.3 Variable Universal Life (VUL)
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