Variable life insurance

Variable life insurance is a form of permanent life insurance that ties the policy's value to investment performance. Premiums (after charges) are invested in a separate account — a menu of subaccounts similar to mutual funds — chosen by the policyholder. The cash value, and to a degree the death benefit, rise and fall with those investments rather than growing at a rate set by the insurer.

In the traditional scheduled-premium design, the policyholder pays a fixed premium and the policy provides a guaranteed minimum death benefit; strong subaccount performance can push the actual death benefit above that floor. The cash value, however, carries no guarantee — it can decline in a down market. This is the key contrast with whole life insurance, where the insurer's general account backs guaranteed cash value growth. Policyholders bear the investment risk in exchange for the potential of greater long-term growth, and earnings inside the policy grow tax-deferred.

Because the policyholder assumes investment risk, variable life is legally a security as well as an insurance product. It must be sold with a prospectus, and the person selling it needs both a state insurance license and securities registration (with the issuer operating through a broker-dealer). Suitability matters: variable life fits buyers who need permanent coverage, can tolerate market risk, and have a long time horizon.

Variable life insurance appears on the SIE and Series 66 securities exams — usually testing its dual regulation and who bears investment risk — and on state life insurance licensing exams, which focus on how variable products differ from whole life and universal life.