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Buying life insurance may seem optional if you’ve never had a policy before, but it may actually be more important than insurance you buy for your home or your car. After all, a life insurance policy can protect your family from financial hardship and stress in the event of your untimely death, and what could possibly be more important than that?

Of course, there are many types of life insurance you can buy. Variable life insurance is one of the main types to consider if you prefer to have lifetime coverage with an investment component. However, this type of life insurance comes with considerable risk that you should know about and understand before you consider purchasing a policy.

What is variable life insurance?

Variable life insurance is one of the more complex types of life insurance available, mostly because it includes an insurance component and an investment component all in one product. Variable life insurance coverage is permanent, meaning you’ll pay premiums for your lifetime instead of for a specific term, and your family will receive a death benefit regardless of how old you are when you die.

While some types of permanent life insurance have a savings component that builds cash value that you can borrow against, variable life insurance instead includes a savings account that lets you invest the underlying funds in stocks, money market funds and bonds. That’s the investment part of the policy.

A variable life insurance policy allows you to choose how to invest the policy's cash value.
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A variable life insurance policy allows you to choose how to invest the policy's cash value.

This savings account gives you the chance to substantially grow the cash value of your policy during times when the stock market performs well, but you can also face substantial risk. If the investments in your variable life insurance policy don’t perform as well as you hoped, the cash value of your policy could decrease at the same time the death benefit of your policy drops.

With that said, some variable life insurance policies promise a minimum death benefit that guarantees your payout won’t drop below a specific amount — even if your investments underperform.

What’s the difference between variable and variable universal life insurance?

As you compare the types of life insurance, you’ll find that most variable life insurance policies marketed to consumers are actually variable universal life insurance, which is a form of universal life insurance. With variable universal life insurance (VUL), you get the chance to combine the investing benefits of variable life with the option for flexible insurance coverage.

VUL policies allow the policyholder to adjust his or her death benefit up and down based on their needs. However, the death benefit for a variable life policy can also go up and down depending on your investment returns.

Your investment returns can affect the value of your death benefit in a variable universal life insurance policy.
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Your investment returns can affect the value of your death benefit in a variable universal life insurance policy.

You may be able to use the cash value in a variable life policy to pay your insurance premiums, and the cash value of a variable life policy grows on a tax-deferred basis. The same is true of a VUL policy — it includes cash value that grows on a tax-deferred basis, which you can usually borrow against.

Both variable life insurance and VUL include at-risk investments, and thus are considered a securities contract and governed by securities laws. As such, the US Securities and Exchange Commission (SEC) has released investor alerts and bulletins about variable life insurance with specific warnings about investment fees and complicated tax rules for these policies.

If you’re in the market for variable life insurance, you need to closely examine the prospectus for this securities contract. The SEC notes that the prospectus is always free, and you should read this important document since it includes information about each policy, including the fees and expenses involved.

Who should buy variable life insurance?

Variable life insurance definitely isn’t for everyone. In fact, it’s really only appropriate for investors who are comfortable with the risks involved. The SEC also notes that “substantial fees, expenses and tax implications generally make variable life insurance unsuitable as a short-term savings vehicle,” so you definitely will only want to consider variable life insurance as part of a long-term investment strategy.

Variable life insurance is generally only appropriate for people with a deep understanding of their investment strategy.
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Variable life insurance is generally only appropriate for people with a deep understanding of their investment strategy.

Also, insurance professionals can earn huge commissions on variable life policies versus other types of coverage, such as term life insurance. That doesn’t mean variable life insurance isn’t the right choice for you. But you should take extra steps to vet the suitability of a variable life policy for your personal needs.

Before you buy a variable life insurance policy, you should spend some time thinking over why you want to bundle life insurance with your investments. Once you dive in, you may decide that you don’t have to bundle your investments with your life insurance policy. Instead, you could purchase a term life insurance policy that provides a death benefit on a timeline of your choosing (usually 10 to 30 years) and separately invest your money in stocks, bonds and mutual funds within a retirement or traditional brokerage account.

It’s possible for variable life insurance to make sense for your situation and your goals, but the high fees these policies require can make them just as expensive as they are risky. It can help to speak with an insurance professional, but make sure to vet their advice. And at the end of the day, take time to educate yourself so you wind up with a life insurance policy that best suits your needs and your budget.

Not sure if variable life insurance is right for you? Read CNN Underscored’s guide to all the different types of life insurance.

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