Variable life is a type of whole life insurance that is characterized with a flexible cash value and death benefit. The reason for the flexibility is that the payout associated with a variable life policy is governed by the performance of the underlying investments that fund the coverage. The actual structure of these types of policies follow policies that are common to money market and traditional stock accounts.
While a variable life policy does not include fixed income funds when it comes to death benefits and cash value, most versions do guarantee some rate of coverage in spite of market performance. This is particularly true with the death benefit. Often, the policy will identify a minimum amount of payout even if the underlying investments are not doing well. This provision helps to ensure the policyholder that at least a minimum return on the policy will be realized.
One of the advantages of a variable life insurance policy is that high returns on the value of the policy are not subject to taxes until the cash value earnings are actually withdrawn. This is different from stock funds and bond funds, where taxes are applied at the time the earnings are realized. When coupled with the obvious benefit of unlimited potential to accumulate more valued than a fixed rate life policy, the variable life model becomes very attractive.
However, it is important to note that a variable life policy will also involve the same risks associated with investing in stocks and bonds. This means that it is a good idea for the policyholder to be actively monitoring the market conditions and performance, in order to be aware of the current worth of the coverage. While the policy may include provisions guaranteeing a minimal return, it is possible over time to pay more in premiums than the guaranteed worth. Care should be taken to weigh all factors before choosing to go with a variable life insurance policy.