Variable life insurance is a form of whole life insurance that accumulates cash value on a tax-deferred basis. Variable life insurance operates similarly to a mutual fund because the insured pays premiums that go into a separate investment account owned by the insured. The variable life insurance policy yields a minimum death benefit to the insured like other life insurance policies. In addition, variable life insurance will have cash value that varies based upon the performance of the investments and part of the death benefit may be variable as well. Variable life insurance policies are securities and must follow federal securities laws as well as state insurance regulation.
Given the investment risks posed by variable life insurance, regulators emphasize the need for companies to clearly explain policy risks to individuals and distinguish investment accounts and policies from others. Many issues arising with variable life insurance regard companies not following the formalities of securities and consumer protection law. Also, individuals often take on debt based on the insurance policies which can be risky. Further, variable life insurance policies have many fees involved in their creation and management which may make them improper for some individuals.
For more information on requirements and important aspects of variable life insurance, see the Securities and Exchange Commission guidance here.
[Last updated in April of 2022 by the Wex Definitions Team]