Variable life insurance is a type of permanent life insurance with a varying cash value. The long-term savings, aka investment aspect, of variable life insurance provides a tax-free sum to beneficiaries. The amount of the policy’s total death benefit payout goes up or down depending on the performance of underlying securities held in the policy.
The volatility involved with variable life insurance is paired with tax-free benefits. The potential tax savings can be significant as taxes aren’t required on distributions.
Of course, there are higher risks involved with owning a variable life insurance policy versus a universal life insurance policy, which has a minimum guaranteed return each year.
It’s up to you to decide how much risk you are willing to take over the long-run with the cash value portion of your life insurance. During bull markets, policyholders can expect the returns to be higher than when the markets are down. During bear markets, the opposite is true.
Prospective policyholders who are risk-averse are typically better off with a universal life insurance policy, also known as a standard life insurance policy that has a pre-determined total death benefit amount. The fluctuating nature of variable life insurance’s cash value and its more complex structure tend to turn away the average consumer.
However, if you study the stock market performance over the long run, stocks have shown to return 10% on average per year since 1926. Therefore, if you have a long-term time horizon, going the variable life insurance route may perform better.
Think about a variable life insurance policy like investing in stocks and a universal life insurance policy more like investing in bonds. Bonds have returned closer to 5.4% a year since 1926.