Legal Definitions - variable life insurance

Variable life insurance is a type of permanent life insurance policy that combines a death benefit with an investment component. Unlike traditional whole life insurance, where the cash value grows at a fixed or guaranteed rate, the premiums paid into a variable life policy are invested in various sub-accounts chosen by the policyholder, similar to mutual funds.

This means the policy's cash value, and potentially a portion of its death benefit, can increase or decrease depending on the performance of these underlying investments. While there is always a guaranteed minimum death benefit, the investment risk means the policyholder bears the potential for gains or losses. Because of its investment features, variable life insurance is regulated as both an insurance product and a security, requiring companies to clearly explain the associated risks and fees to consumers.

• Scenario: Sarah, a 35-year-old software engineer, wants to ensure her young children are financially protected if something happens to her, but she also wants her insurance premiums to work harder for her over the long term.

  Illustration: Sarah purchases a variable life insurance policy. Instead of her cash value growing at a fixed, conservative rate, she allocates a portion of her premiums into several investment sub-accounts offered by the insurer, such as a growth fund and a balanced fund. If these investments perform well, her policy's cash value will increase significantly, potentially allowing her to borrow against it later or surrender the policy for a larger sum. However, if the market declines, her cash value could decrease, though her family would still receive the guaranteed minimum death benefit. This demonstrates how the policy combines a death benefit with an investment component whose value fluctuates with market performance.

• Scenario: David, a 45-year-old entrepreneur, owns a successful consulting firm and wants to provide a safety net for his business partners and family. He also anticipates needing access to capital for future business expansions.

  Illustration: David opts for a variable life insurance policy. The death benefit provides security for his business and family. Crucially, the policy's cash value is invested in a diversified portfolio of stocks and bonds. David understands that while the cash value might fluctuate with market conditions, strong investment performance could lead to substantial growth, offering a larger pool of funds he could potentially access through policy loans for business opportunities, while still maintaining the core insurance coverage. This highlights the dual nature of the policy as both protection and a potentially growing asset, subject to market risks.

• Scenario: Maria, a 50-year-old investor with a high-risk tolerance, has already maximized her retirement accounts and is looking for another vehicle to grow her wealth while also providing a death benefit for her heirs.

  Illustration: Maria chooses a variable life insurance policy, specifically selecting sub-accounts focused on aggressive growth stocks. She is comfortable with the potential for significant market swings, understanding that while her policy's cash value could experience substantial gains during bull markets, it could also see declines during downturns. She values the tax-deferred growth potential and the ability for her death benefit to potentially increase beyond the minimum guarantee if her chosen investments perform exceptionally well over the long term. This illustrates how variable life insurance appeals to individuals seeking investment growth and who are willing to accept market risk for potentially higher returns within a life insurance structure.