Variable Life Insurance

Example

“Robert's variable life insurance policy death benefit increased from $250,000 to $320,000 over five years due to strong performance in his chosen equity subaccounts.”

Memory Tip

Variable Life = Life insurance where cash value VARies with Investment Ability - you control where cash value is invested.

Why It Matters

Variable life insurance offers the potential for cash value growth that can outpace inflation and provide flexible access to funds through loans or withdrawals. However, poor investment performance can reduce both cash values and death benefits, requiring policyholders to actively manage their investment choices.

Common Misconception

Many assume that because premiums are typically fixed, the policy is guaranteed to stay in force, and that professional management means no risk. Actually, poor investment performance can cause the policy to lapse if cash values become insufficient to cover policy charges, and investment risk is borne entirely by the policyholder.

In Practice

Jennifer pays $3,000 annually for a $200,000 variable life policy, investing her cash value in 60% stocks and 40% bonds. After 15 years of varying market performance, her cash value has grown to $48,000, and strong performance has increased her death benefit to $245,000. However, during the 2008 market crash, her cash value temporarily dropped to $28,000, and her death benefit fell to $195,000 before recovering with the market.

Etymology

Variable life insurance emerged in the 1970s as a response to inflation concerns, allowing policyholders to invest their cash values in securities rather than the insurer's general account.

Common Misspellings

Related Terms

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Other insurance terms you should know

See Also