What is Variable Life Insurance—and How Does It Work?

Variable life (VL) insurance is a type of permanent coverage that includes the option to invest your cash value in stock market-based subaccounts. A variable life policy offers lifelong protection with an added investment component you manage. The death benefit stays in place as long as the policy remains in force, and the cash value can rise or fall with market performance and policy charges.

Unlike term life (pure protection for a set period) or traditional whole life (guarantees with fixed cash value growth), a variable life insurance policy gives you investment control and the potential for higher growth, but it also comes with more responsibility because you need to actively manage your policy. You’ll choose from a menu of subaccounts, monitor performance, and keep an eye on fees, so the policy stays on track for the long term. If you prefer simpler options, you can compare variable life to term and whole life to see which style fits your goals and comfort with risk. In this guide, we will walk through the pros and cons of variable life to see if it might be a good fit for you.

People often think variable life (VL) and variable universal life (VUL) are the same. They’re related but different. VL usually uses a set premium schedule with fewer adjustment levers. VUL keeps the ‘variable’ investing piece, but adds flexible funding and more options to adjust the death benefit.

So while there is some overlap, variable life and VUL are different products. Variable life is more like whole life insurance, with its fixed premium payments, while variable universal life has the flexibility of universal life insurance, along with the need for active managing of the policy.

Key Differences

Here is a quick visual overview of the key differences between VL and VUL.

Variable life insurance blends lifelong protection with investing. Here’s an overview of how the components of a VL policy work in simple terms.

Fixed Death Benefit

When you buy the policy, you choose a base death benefit. That amount is designed to stay in place for the life of the policy as long as you keep it funded and meet the contract rules (yet some policies allow changes later through riders or a new application). Investment performance can affect available cash value, but the policy keeps at least the minimum death benefit stated in the contract while it remains in force.

Cash Value Component

Part of each premium goes to a cash value account that you can invest in “subaccounts.” These look a lot like mutual funds with different risk levels. Values can grow over time, but they can also decline with the market. Policy charges come out of the cash value, so it’s important to review statements and keep funding on track.

Cash value generally grows tax-deferred. You may be able to take withdrawals or policy loans later, subject to the policy’s rules. Any money you take out will reduce the value left in the policy and can impact the death benefit.

Premium Allocation

Every payment is split. One part covers the cost of insurance and policy expenses. The rest goes to the investment options you choose, or to any fixed account the policy offers. You decide how to allocate among the subaccounts, and you can usually rebalance over time as your risk tolerance changes. It’s important to understand that paying too little for too long can drain cash value, so choose a premium you can keep up with and review it each year.

Variable life tracks the markets you invest in. That creates real growth potential, but it also means the value can move up and down. The policy stays healthy when investment performance and funding are both strong enough to cover ongoing costs.

Investment Returns and Fluctuation

Cash value goes into investment “subaccounts” similar to mutual funds. You choose the mix (such as stock, bond, or balanced options) and you can change it over time. Here are some key considerations to keep in mind.

• Returns follow the market. Values can rise, stay flat, or fall. There is no guaranteed rate of return.
• Early losses hurt more. When markets dip, ongoing policy charges still come out, which can shrink the account faster.
• Allocation matters. A mix that matches your risk comfort can make swings easier to manage. Rebalancing helps keep that mix on target.
• Keep funding steady. If the account drops and you pay too little for too long, the policy may need higher premiums to stay on track.
• Be careful with loans and withdrawals. Taking money out reduces the amount left invested and can lower the death benefit. Loan interest accrues and must be monitored.

Fees and Expenses

Every policy has costs that come out of the cash value. Knowing them helps you understand real-world results.

• Cost of insurance: The charge for the death benefit, which can change over time as you age.
• Policy and administrative fees: Flat or periodic charges for keeping the contract in force.
• Investment expenses: Each subaccount has an expense ratio that reduces net returns.
• Mortality and expense (M&E) risk charges: Common in variable designs to cover insurance and administrative risk.
• Riders: Optional features add their own fees.
• Transaction costs: Some contracts charge for transfers, partial surrenders, or other transactions.
• Surrender charges: Early cancellations often carry a fee during the first years that can erode any accumulated cash value.

Why fees matter: costs reduce growth. You’ll see them in the prospectus and on annual statements. Ask for anillustrationthat shows both guaranteed and non-guaranteed columns, and review it each year to confirm your funding level and mix still supports your goals.

(A prospectus is the official, regulator-required document that explains a variable policy’s features, fees, and risks. It outlines the subaccount investment options, charges, and how performance can affect your cash value and death benefit. You should carefully review the prospectus before buying a policy.)

Variable life insurance can offer meaningful advantages if you want lifelong protection and the chance to grow cash value. Here are the upsides most people look for.

Tax-Deferred Growth

Part of each premium goes into a cash value account. Earnings inside the policy generally grow tax-deferred, which can help more of your money stay invested over time. Many policies allow access through withdrawals or policy loans after the policy has been in force for some time and cash value has accumulated.

• Withdrawals reduce the cash value and may be taxable above your basis (which is the total premiums you have paid in).
• Loans accrue interest and lower the death benefit while outstanding.

Funding discipline matters within a VL policy. Keeping premiums on track helps the policy support both the coverage and the cash value you are building.

Investment Control & Potential Upside

A variable life insurance policy lets you choose from mutual fund-like subaccounts with different risk profiles and performance histories. You can diversify across stock and bond options, adjust your mix as your goals change, and rebalance on a schedule.

Strong markets can lift cash value, which gives you more flexibility later for loans, withdrawals, or simply maintaining coverage with a healthy cushion. The key is choosing an allocation you can live with and reviewing it each year so the policy stays aligned with your long-term goals.

Variable life can be a good fit for some, but it asks more from the owner with hands-on management and a healthy knowledge of the market. Keep these trade-offs in mind as you decide.

Investment Risk

Cash value is invested in market subaccounts. That means it can grow, stay flat, or decline with the market.  This also includes the potential loss of principal.

• Down markets still draw fees from the account, which can shrink value faster.
• If cash value falls and premiums aren’t high enough, the policy may need extra funding to stay in force.
• Loans magnify risk. Interest accrues, and a large balance during a market drop can push the policy toward lapse.
• An allocation you can stick with matters more than chasing returns. Revisit your mix on a set schedule.

Complexity & Oversight

Variable policies have more moving parts than term or traditional whole life.

• You choose investments, review a prospectus, and monitor subaccount performance and fees. Annual statements and illustrations help you see whether funding still supports your goals.
• Policy mechanics such as transfers, withdrawals, loans, and funding rules, have consequences for cash value and the death benefit.
• Overfunding can change tax treatment if a policy becomes a Modified Endowment Contract (MEC). When in doubt, ask your insurer and consult a tax professional.

Higher Costs than Other Policies

You pay for lifelong coverage and the investment platform inside the policy.

• Ongoing charges include the cost of insurance, administrative fees, mortality and expense (M&E) charges, and each subaccount’s expense ratio.
• Optional riders add their own fees.
• Many contracts have surrender charges in the early years, which makes exiting early expensive.
• Compared with term life, premiums are typically higher for the same death benefit. Make sure the budget is sustainable for the long haul.

Variable life insurance can work well for some households, but it’s not a good fit for everyone. You should carefully consider your options to see what might be a good match for you.

Typical VL Policyholder Profile

• You want permanent coverage and are comfortable investing. A variable life insurance policy pairs lifelong protection with market-based subaccounts you choose.
• You can fund it steadily for many years. Consistent premiums help support both the death benefit and cash value through market cycles.
• You already contribute to 401(k)/IRA/HSA plans and want another tax-deferred bucket tied to insurance protection.
• You will review the policy each year. That includes checking allocations, fees, and whether funding still supports your goals.
• You prefer flexibility over guarantees. You accept that cash value can rise or fall and that loans and withdrawals need careful monitoring.
• You have an emergency fund and manageable debt, so you are not relying on policy cash value for short-term needs.

Alternatives to Consider

If you’re not quite sure about a variable life policy, these are some options to consider.

• Term life + investing the difference: This approach is touted by many finance experts. This solution pairs affordable coverage with a large death benefit for a set period with saving in retirement accounts or a standard investment account. This could be a good option if the main goal is income protection during working years.
• Whole life: Whole life offers permanent coverage with guaranteed premiums and guaranteed cash value growth, plus potential dividends on participating policies. Whole life can be a good fit if you value stability and simpler mechanics.
• Guaranteed universal life (GUL): This kind of permanent coverage focused on a no-lapse guarantee to a target age, usually with little cash value accumulation. GUL policies are often priced between term and whole life for lifelong protection.
• Universal life (UL) or indexed UL (IUL): UL policies feature flexible-premium designs that credit interest at a declared rate (UL) or by an index formula with caps and floors (IUL). They sit between whole life guarantees and variable life market exposure.
• Variable Universal Life (VUL): Variable universal life policies offer flexible-premium permanent coverage with cash value invested in market subaccounts. VUL policies allow you to adjust funding and, in many cases, the death benefit. It offers higher growth potential with higher volatility and fees, and works best with regular reviews. Some policies include optional no-lapse features if specific funding rules are met.
• “Blend” approach: Some families keep a base of term life for big, time-limited needs and add a smaller permanent policy for lifelong goals. This can balance budget and flexibility while you compare variable life insurance to other permanent options.

Variable life insurance pairs lifelong protection with market investing. It offers control and growth potential, but it also brings risk, higher costs, and requires more oversight. VL can be a good fit if you want permanent coverage and you’re comfortable managing allocations, fees, and funding over many years. If you prefer stability and simpler mechanics, term or traditional whole life may suit your needs better.

If you’d like to see what fits your goals and budget now, Ethos can help. You can compare coverage amounts, review policy details, and see real pricing online in a few minutes.