Understanding Variable Life Insurance

As a type of permanent life insurance, variable life insurance can provide lifelong protection, as well as build cash value over time. Unlike basic whole life or universal life insurance, a variable life policy gives you a choice in how your money is invested by incorporating mutual funds into the life insurance policy.

Variable Life Basics

While variable life insurance is similar to a universal life policy, two major differences exist:

• Variable life allows you to invest your money in mutual funds, which may provide a greater return. You can choose one or a combination of portfolios with a variety of risk levels and growth potential. With a universal life policy, on the other hand, safe investments are chosen for you, leading to a lower rate of return.
• Variable life insurance allows for flexible premiums. You can choose to increase or decrease the premium payments you make so long as the policy maintains a certain cash value.

With a variable life policy, you may enjoy tax-deferred earnings and long-term growth potential. You can even make tax-free transfers between your investment portfolios as your needs or economic conditions change. Be aware, however, that a variable life policy can be risky and cash value isn't guaranteed--with any investment there is always the risk of loss.

Variable Life Insurance Advantages

If you choose variable life insurance, you'll enjoy some distinct advantages. Your investment will have a greater growth potential than you you'd see with other types of permanent life insurance, because you select the investment portfolios that are right for you. In addition to flexibility and earning potential, you'll also enjoy flexible premiums, allowing you to budget efficiently over the long term.

Another advantage of variable life insurance is that if your investment does well, you may not be taxed on your gain unless you surrender your policy.

Disadvantages of Variable Life

When deciding whether variable life insurance is right for you, remember that when you select investments with unpredictable gains or losses, you're assuming risk. If your investments do poorly, your cash value--as well as your death benefit amount--could decrease or the policy could even lapse leaving you with no life insurance.