Pros and Cons of Variable Life Insurance

When choosing life insurance, you may come across a plan called variable life insurance. This policy not only offers lifelong protection but also lets you invest your money. But like all financial tools, there are pros and cons of variable life insurance to consider before making a choice. Let’s learn what variable life insurance is, how it works, and what its benefits and drawbacks are.

When choosing life insurance, you may come across a plan called variable life...

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What is Variable Life Insurance?

Variable life insurance is a type of permanent life insurance. This means it covers you for your entire life, as long as you keep paying the premiums. But it goes a step further by allowing you to invest the cash value part of your policy in market-linked funds, such as equity, debt, etc.

The performance of these funds decides how much your policy’s cash value grows. So, if the market does well, your returns increase. But if the market drops, so can your investment value.

Remember that the term Variable Life Insurance is not commonly used in India. A similar product available in the Indian market is the ULIP (Unit-Linked Insurance Plan).

How Variable Life Insurance Works

You pay your premium regularly.
A portion of this premium goes toward your life cover.
The rest is invested in market-linked funds, depending on your risk appetite, i.e., the level of risk you’re willing to take.
Your returns change based on market performance.
On death, your nominee receives the sum assured plus the fund value, after applicable charges.

Example

Let’s say Rohan buys a variable life insurance policy with a sum assured of ₹30 lakhs and chooses to invest in equity funds. After several years, the investment grows to ₹10 lakhs. If Rohan passes away, his nominee gets ₹30 lakhs (sum assured) + ₹10 lakhs (fund value). However, if the market underperforms, the investment value could be lower.

Pros and Cons of Variable Life Insurance

Take a look at the pros and cons of a variable insurance policy:

Advantages of Variable Life Insurance

Limitations	What It Means
Benefits	What It Means
Lifelong Protection	It offers lifetime coverage, unlike term plans that end after a set number of years.
Market-Linked Growth	You can grow your cash value over time by investing in market funds, which may offer higher returns.
Flexible Investment Choices	You can choose between equity, debt, or balanced funds based on your risk profile.
Loan or Withdrawal Option	You may be able to borrow against or withdraw from the policy’s cash value in times of need.

Disadvantages of Variable Life Insurance

Limitations	What It Means
Benefits	What It Means
Market Risk	Your returns depend on the stock or bond market, which can go up or down. There is no guaranteed return.
Higher Costs	It comes with fund management fees, mortality charges, and policy admin charges, which can cut into your investment.
Performance Uncertainty	Even with expert fund choices, there’s always a risk your cash value may not grow as expected.
Complex to Understand	To see meaningful returns, you need to stay invested for a long time; not ideal if you want short-term flexibility.

When Should You Consider Variable Life Insurance?

You may want to consider variable life insurance if:

You’re comfortable with market risks and understand long-term investing.
You want life cover with investment opportunities.
You’re looking for a customisable policy where you can adjust your fund allocation.
You are planning long-term goals like retirement or wealth creation alongside insurance.

Let's understand this through a real-life example:

Anjali, 32, is a marketing professional with a good income. She’s financially savvy and regularly invests in market-linked products. She chooses a variable life insurance policy for ₹40 lakhs and opts for a combination of equity and debt funds. Over the years, she has tracked her fund performance and even switched between funds when needed. At 50, she has built a sizable fund value along with life cover. This policy suits Anjali because she understands investments and is willing to take calculated risks.

Conclusion

Variable life insurance offers a unique mix of life cover and market-linked investment. It gives you the opportunity to grow your savings along with protecting your loved ones. However, it comes with risks and costs that you must understand before buying. By weighing the pros and cons of variable life insurance, you can make a smarter choice to find a match for your financial goals, risk profile, and long-term plans.

Frequently Asked Questions (FAQs)

Is variable life insurance a good investment?

Variable life insurance can be a good option if you are comfortable with market risks and looking for long-term growth along with life cover. The returns depend on how well your chosen funds perform.

What happens if the market performs poorly?

Your policy’s fund value may be reduced, but the sum assured remains intact unless the policy terms say otherwise.

Can I switch my investment funds later?

Yes, most insurers allow you to switch between funds, e.g., equity to debt, based on your risk appetite and market outlook.

What are the main costs of variable life insurance?

You’ll likely pay fund management charges, mortality charges, policy admin fees, and possibly switching or withdrawal charges.

Does the cash value grow at a fixed rate?

No. Unlike whole life insurance, the cash value in a variable life plan is not fixed. It changes based on market performance.

Is it better than term insurance?

Term insurance is cheaper and provides pure protection. Variable life is more expensive but combines protection with investment. Which one is better depends on your personal needs.

Written by Neviya Laishram

1.7K Linkedin Followers

Reviewed by Vaibhav Kumar Kaushik

A senior editor with years of expertise, she fine-tunes content that connects, converts, and builds trust. She transforms heavy life insurance concepts into clear, aha-moment reads. Writing is her passion, and thinking ahead is second nature. When not wrangling words, she’s crushing game levels because every challenge is a puzzle waiting to be solved.