The best way to define Variable life insurance is to say that it is similar to universal life in that any premium paid in addition to the cost of insurance and annual fees is invested and contributes to the cash value of the policy. It is, however different from a universal in that the cash or savings portion is invested in variable products such as equities, bonds, and mutual funds rather than in a fixed interest savings account. You cannot take money out of a variable life (although you can with a universal), but you can borrow against it, and upon your death, the cash value or minimum guaranteed death benefit (whichever is higher) will be paid.
Variable life insurance may, during periods of economic growth, have bargain rates. If the investments are performing well, your premium will be very affordable. That’s because your broker will try to invest in equities that pay cash dividends. These dividends can help pay your cost of insurance, sometimes making premium payment from you almost unnecessary. It is important, however, to have a broker who makes a living with variable life insurance as he needs to keep a constant watch on your funds in order to make the best investment decisions on your behalf. If you have a good broker and are not prone to stress when the market is down, a variable life can be an option that would leave your heirs with a sizable benefit.
Variable life insurance is difficult to find, and must be sold by an insurance agency that has securities investment accounts and by a person with a securities license due to the investment in equities. Most companies that sold variable life have changed to “variable universal life.” A VUL will work the same as a VL regarding investment of premium, but like any universal, the cash side can be a source of emergency cash, additional retirement funds, and loans. You can actually pull excess cash out of a VUL, something you cannot do with a VL.
Invest in either a VUL or VL with caution and an awareness that it is a long term investment. It is best for younger people who have 30 or 40 years before retirement. The market by its very nature goes both up and down. Over time, equity values usually increase. However, if the market performs poorly, your entire investment could be lost, leaving you without enough cash to pay the cost of insurance for your death benefit. In such a circumstance, you would have to increase your premium to keep the death benefit portion of the policy in force. In any case, if your accumulation fund drops, the face value of your death benefit which may have increased substantially over the years, will also drop. This decrease could be all the way down to the guaranteed minimum death benefit specified in your contract.
Even the best brokers cannot always prevent a loss of principle in a VUL. Work with a company that has high ratings (check Street.com as the ratings there are purchased by people “on the street” rather than by the company itself) and with a broker who has a track record of successfully growing VUL policies. Then, relax and trust the broker to do his job. Under ideal conditions, a VUL can be one of the fastest growing types of life insurance policies.