Variable Adjustable Life Insurance Explained (2025 Guide)

Life insurance is a cornerstone of sound financial planning, providing a safety net for your loved ones. But life isn’t static; your financial needs and goals evolve. What if your life insurance could adapt alongside you? Enter Variable Adjustable Life Insurance, a type of permanent policy designed to offer both lifelong protection and the potential for significant cash value growth tied to market performance, coupled with flexibility in how you manage your premiums and death benefit.

However, this flexibility and growth potential come with complexity and investment risk. Understanding if variable adjustable life insurance is the right fit requires careful consideration and expert guidance. That’s where Insurance By Heroes comes in. Founded by a former first responder and military spouse, our agency is staffed by professionals with backgrounds in public service. We understand commitment, duty, and the importance of making informed decisions to protect what matters most. As an independent agency, we aren’t tied to a single insurance company. We partner with dozens of top-rated carriers, allowing us to shop the market and find the policy – from any suitable type, including variable adjustable life insurance – that truly aligns with your unique circumstances and goals.

What Exactly is Variable Adjustable Life Insurance?

Variable Adjustable Life Insurance, often falling under the umbrella of Variable Universal Life (VUL) insurance, is a form of permanent life insurance. Unlike term insurance, which covers you for a specific period, permanent policies are designed to last your entire lifetime, as long as premiums are paid and the policy remains in force.

What sets variable adjustable life insurance apart are its two key characteristics:

• Variable Component: The policy’s cash value is linked to underlying investment options, similar to mutual funds, known as “subaccounts.” You typically choose how your cash value portion is invested from a range of options offered by the insurer, often including stock funds, bond funds, and money market accounts. This means the cash value has the potential to grow significantly based on market performance, potentially outpacing traditional whole life policies. However, it also means the cash value can decrease if the chosen investments perform poorly. There is inherent market risk involved.
• Adjustable Component: This type of policy offers flexibility regarding premium payments and the death benefit amount. Within certain limits defined by the policy contract, you may be able to increase or decrease your premium payments, or even skip payments (though this can impact the policy’s longevity and cash value). You may also have the ability to adjust the death benefit amount, although increasing it usually requires new medical underwriting.

It’s crucial to distinguish variable adjustable life insurance from other permanent policies:

• Whole Life Insurance: Offers guaranteed cash value growth (at a typically modest rate set by the insurer), guaranteed level premiums, and a guaranteed death benefit. It provides stability but less growth potential and flexibility.
• Universal Life Insurance (Standard/Fixed): Also offers premium and death benefit flexibility like its variable counterpart. However, its cash value growth is tied to current interest rates credited by the insurance company (subject to a minimum guarantee), making it generally less volatile but with lower growth potential compared to variable policies during strong market periods.

Understanding these distinctions is vital. The “best” type of policy doesn’t exist in a vacuum; it depends entirely on your individual financial situation, risk tolerance, and long-term objectives. Because Insurance By Heroes works with numerous carriers, we can objectively explain the nuances of variable adjustable life insurance alongside other options, ensuring you see the full picture before making a decision.

How Does Variable Adjustable Life Insurance Work?

Understanding the mechanics of variable adjustable life insurance helps clarify its potential benefits and risks. Here’s a breakdown:

Premium Payments and Allocation

When you pay your premiums, the money is allocated in several ways:

• Cost of Insurance (COI): This covers the pure cost of the life insurance protection itself. It typically increases as you age.
• Policy Fees and Charges: Various fees are deducted, such as mortality and expense (M&E) charges, administrative fees, and charges for any optional riders you’ve added. Investment management fees associated with the subaccounts are also factored in.
• Cash Value Contribution: The remaining premium amount is allocated to the cash value component, invested in the subaccounts you selected.

The flexibility feature means you might choose to pay only the minimum premium required to cover the COI and fees, pay a target premium designed to build cash value over time, or pay the maximum allowable premium to accelerate cash value growth potential (subject to IRS limits).

Cash Value Accumulation

The cash value grows (or shrinks) based on the performance of the investment subaccounts you’ve chosen, minus the internal policy fees and charges. This growth occurs on a tax-deferred basis, meaning you don’t pay income taxes on the gains as they accumulate within the policy.

Crucially, this growth is not guaranteed. Unlike whole life or fixed universal life, the cash value in a variable adjustable life insurance policy can fluctuate significantly and even decline, potentially requiring higher premium payments later to keep the policy from lapsing.

The Death Benefit

Like other universal life policies, variable adjustable life insurance typically offers two main death benefit options:

• Option A (Level Death Benefit): The death benefit remains level. As the cash value grows, the net amount at risk for the insurance company decreases. This generally results in lower policy charges compared to Option B.
• Option B (Increasing Death Benefit): The death benefit equals the specified face amount plus the accumulated cash value. This provides a potentially larger payout to beneficiaries but usually comes with higher internal costs because the net amount at risk for the insurer remains higher.

The “adjustable” feature allows you, within policy limits and often subject to underwriting for increases, to change the face amount of the death benefit as your needs change over time.

Investment Subaccounts

These are the investment engine of the policy. Insurers offer a portfolio of options with varying risk profiles, such as:

• Equity funds (tracking stock market indices or specific sectors)
• Bond funds (government or corporate)
• Balanced funds (a mix of stocks and bonds)
• Money market funds (lower risk, lower return potential)
• International funds

Choosing subaccounts requires careful consideration of your risk tolerance, investment timeline, and financial goals. It’s essential to review the prospectus for each subaccount, which details its objectives, strategies, risks, and fees.

Navigating these choices can be daunting. An independent agency like Insurance By Heroes plays a critical role here. We help you understand the options available from different carriers, explain the risk profiles, and align them with your comfort level – something a captive agent representing only one company’s limited fund lineup cannot do as effectively.

Policy Loans and Withdrawals

Once sufficient cash value has accumulated, you can typically access it through:

• Policy Loans: You can borrow against the cash value, usually tax-free. Loans accrue interest, and outstanding loan balances plus interest reduce the death benefit paid to beneficiaries if not repaid. Unpaid loans can also cause a policy to lapse if the loan balance exceeds the cash value.
• Withdrawals: You can withdraw portions of the cash value. Withdrawals up to your basis (total premiums paid) are generally tax-free. Withdrawals exceeding your basis are typically taxed as ordinary income. Withdrawals permanently reduce the cash value and the death benefit.

Accessing cash value should be done carefully, considering the potential impact on your policy’s long-term viability and tax implications.

The Flexibility Factor: Adjusting Your Coverage

One of the primary attractions of variable adjustable life insurance is its adaptability. Life events – marriage, children, buying a home, starting a business, planning for retirement – often necessitate changes in financial protection needs and budget priorities.

Adjusting Premium Payments

Within limits set by the policy and IRS regulations, you can often:

• Increase Premiums: Pay more than the target premium to potentially build cash value faster, especially during strong market conditions or when you have extra funds.
• Decrease Premiums: Pay less than the target, perhaps down to the minimum required to cover current costs, during times when cash flow is tight.
• Skip Premiums: If sufficient cash value has accumulated, you might be able to skip premium payments altogether for a period, with the policy costs being deducted from the cash value.

Caution: Consistently underfunding the policy by paying only minimum premiums, especially during periods of poor investment performance or as the internal cost of insurance rises with age, significantly increases the risk of the policy lapsing prematurely. It’s vital to understand how premium adjustments affect the long-term health of your coverage.

Adjusting the Death Benefit

Your need for life insurance coverage isn’t static. Variable adjustable life policies often allow you to:

• Increase the Death Benefit: If your financial responsibilities grow (e.g., new mortgage, more dependents), you may apply to increase the policy’s face amount. This typically requires new proof of insurability (medical exam and underwriting).
• Decrease the Death Benefit: As your financial obligations lessen (e.g., children grown, mortgage paid off), you might choose to reduce the death benefit, which can lower the policy’s internal costs and potentially reduce the required premiums.

The specific rules and flexibility options vary significantly from one insurance carrier to another. This is a key area where working with Insurance By Heroes provides immense value. Because we represent dozens of companies, we can compare the specific flexibility provisions – how easy it is to adjust premiums, the rules for changing the death benefit, the grace periods – across different carriers to find one whose contract best suits your potential future needs. An agent tied to one company can only offer what that company provides, which might not be the best fit for your long-term adaptability requirements.

Understanding the Investment Component and Its Risks

The “variable” aspect is where this policy type diverges most significantly from traditional insurance. It introduces the potential for higher returns but also exposes policyholders to market risk.

Subaccount Choices and Risk Tolerance

Selecting the right mix of subaccounts is crucial. Your choices should align with your personal tolerance for risk and your long-term financial objectives. A younger individual with a long time horizon might be comfortable allocating more to equity funds for higher growth potential, while someone nearing retirement might prefer a more conservative allocation with a greater emphasis on bond or money market funds to preserve capital.

Diversification across different asset classes within the available subaccounts can help mitigate some risk, but it doesn’t eliminate the possibility of loss.

Market Risk: The Double-Edged Sword

The cash value and, potentially, the death benefit (especially under Option B or if the policy is underfunded) are directly impacted by the performance of the chosen subaccounts. During bull markets, the cash value can grow substantially faster than in fixed insurance products. However, during market downturns, the cash value can decrease, potentially significantly.

If the cash value drops too low to cover the ongoing policy charges (COI and fees), the policy could enter a grace period, requiring substantial additional premium payments to prevent it from lapsing and terminating coverage entirely. This is the most significant risk associated with variable adjustable life insurance.

Fees and Charges: Impact on Returns

Variable adjustable life policies typically have higher internal fees compared to other types of life insurance due to the costs associated with managing the investment component. These fees directly reduce the returns credited to your cash value. Common fees include:

• Mortality and Expense (M&E) Charges: Compensate the insurer for various risks and guarantees.
• Cost of Insurance (COI): The charge for the pure death benefit protection.
• Administrative Fees: Flat annual fees or monthly charges for policy maintenance.
• Fund Management Fees: Fees charged by the managers of the underlying subaccounts (similar to expense ratios in mutual funds).
• Premium Load Charges: A percentage deducted from each premium payment.
• Surrender Charges: Fees deducted if you surrender (cancel) the policy within a specified period, often lasting 10-15 years or more. These typically decrease over time.

Understanding the cumulative impact of these fees is essential when evaluating a policy’s growth potential. High fees can significantly drag down performance, even in positive market conditions.

Comparing fee structures across different carriers is complex but crucial. As independent agents, the team at Insurance By Heroes helps clients dissect policy illustrations and fee disclosures from multiple companies. We break down the costs so you can make an informed comparison, ensuring you understand the true cost of ownership – a level of transparency often harder to achieve when dealing with an agent selling only their company’s product line.

The Policy Prospectus

Every variable adjustable life insurance policy comes with a prospectus. This legal document provides detailed information about the policy’s features, benefits, risks, fees, charges, and the underlying investment subaccounts. It is essential reading for anyone considering purchasing this type of complex financial product.

Pros of Variable Adjustable Life Insurance

When used appropriately and understood thoroughly, variable adjustable life insurance offers several potential advantages:

• Higher Cash Value Growth Potential: The primary draw is the ability to potentially earn market-based returns that could outpace the fixed interest rates or dividend scales of traditional permanent policies.
• Flexibility: The ability to adjust premium payments and death benefit amounts provides adaptability for changing life circumstances and financial situations.
• Tax-Deferred Growth: Cash value accumulates without being subject to annual income taxes.
• Tax-Free Death Benefit: Like other life insurance policies, the death benefit is generally paid to beneficiaries income tax-free.
• Access to Cash Value: Funds can be accessed via tax-advantaged loans or withdrawals, providing a potential source of liquidity (though impacting policy values and death benefits).
• Lifelong Coverage: As a permanent policy, it’s designed to provide coverage for your entire life, assuming the policy remains adequately funded.

Cons and Risks of Variable Adjustable Life Insurance

It’s equally important to understand the significant drawbacks and risks:

• Investment Risk: Cash value is not guaranteed and can decrease due to poor market performance, potentially leading to policy lapse if not managed carefully. This is the most critical risk to understand.
• Complexity: These policies are inherently more complex than term or whole life insurance, requiring a good understanding of investment principles and ongoing monitoring.
• Higher Fees: Typically involve more substantial internal fees and charges compared to other policy types, which can erode investment returns.
• Potential for Policy Lapse: Underperformance of investments, coupled with rising internal costs (especially COI at older ages) and insufficient premium payments, can cause the policy to lapse, resulting in loss of coverage.
• Surrender Charges: Significant penalties may apply if you cancel the policy in the early years.
• Market Volatility: Performance is tied to market fluctuations, making it less predictable than fixed insurance products.

Weighing these pros and cons isn’t a simple checklist exercise. It requires a personalized assessment. At Insurance By Heroes, our service-driven approach means we take the time to understand your financial picture, your comfort level with risk, and your long-term needs. Because we are independent and work with many carriers, we can honestly assess if the potential rewards of variable adjustable life insurance outweigh the risks for *you*, or if another type of policy from a different carrier might be a safer, more suitable choice. Not every product fits every person, and our loyalty is to you, our client, not to any single insurance company.

Who Is Variable Adjustable Life Insurance Best Suited For?

Given its characteristics, variable adjustable life insurance is generally more appropriate for certain individuals:

• Those Comfortable with Investment Risk: You must be willing and able to accept the possibility that your cash value could decline due to market downturns.
• Individuals Seeking Higher Growth Potential: If your primary goal for cash value accumulation is growth potential beyond fixed interest rates, and you understand the associated risks, VALI might be considered.
• People Needing Long-Term Coverage with Flexibility: If you anticipate needing lifelong coverage and value the ability to adjust premiums and death benefits over time.
• Higher-Net-Worth Individuals: Often used as part of sophisticated estate planning or tax-advantaged savings strategies, potentially maximizing tax-deferred growth.
• Disciplined and Engaged Policyholders: Requires active monitoring of investment performance and ensuring adequate funding to prevent lapse, especially in volatile markets or later in life.

Conversely, variable adjustable life insurance is generally **not** suitable for:

• Individuals who are risk-averse and prioritize guaranteed cash value growth and premium stability.
• Those looking for the lowest-cost life insurance protection (term life usually fills this need).
• People who do not understand or are uncomfortable with investment concepts and market fluctuations.
• Individuals who cannot commit to paying potentially higher premiums if needed to keep the policy in force during market downturns or as costs increase.

It’s essential to have a frank conversation about your risk tolerance and financial goals. Alternatives like Term Life (for temporary needs), Whole Life (for guarantees), or standard Universal Life (for flexibility with less market risk) might be better options. Insurance By Heroes helps you explore all these avenues, leveraging our access to dozens of carriers to compare specific policy features and costs.

Variable Adjustable Life vs. Other Policy Types: A Quick Comparison

• vs. Term Life: Term offers pure death benefit protection for a set period (e.g., 10, 20, 30 years). It’s typically the most affordable initially but has no cash value component and coverage eventually ends unless renewed (at much higher rates) or converted. VALI is permanent, builds cash value (with risk), and is more expensive.
• vs. Whole Life: Whole Life provides guarantees: level premiums, guaranteed death benefit, and guaranteed cash value growth via fixed rates and potential dividends (not guaranteed). VALI offers flexibility and higher growth potential but lacks these guarantees, carrying investment risk.
• vs. Universal Life (Standard/Fixed): Both offer flexibility. Standard UL credits interest based on current rates (with a minimum guarantee), offering modest, more stable cash value growth. VALI links growth to market performance, offering higher potential returns but also the risk of loss.

Choosing between these requires understanding the trade-offs between cost, guarantees, flexibility, and growth potential/risk. As an independent agency founded by individuals with a background in service – understanding diverse needs from experiences as a first responder and military spouse – Insurance By Heroes is uniquely positioned to guide you. We cut through the jargon and compare apples-to-apples options from our wide network of carriers, ensuring the policy *type* and specific *carrier contract* align with your life situation, not just pushing a single product.

Choosing the Right Policy and Carrier

If, after careful consideration, variable adjustable life insurance seems potentially appropriate, selecting the specific policy and carrier is the next critical step. Not all VALI/VUL policies are created equal.

Carrier Financial Strength

Since this is a long-term contract, you want assurance that the insurance company will be around to pay the death benefit decades from now. Check the financial strength ratings from independent agencies like A.M. Best, Moody’s, S&P, and Fitch.

Comparing Fees, Features, and Investment Options

This is where details matter immensely:

• Carefully compare the fee structures (M&E, COI, admin fees, fund expenses).
• Review the range and quality of available subaccounts. Do they align with your investment strategy?
• Examine the specific flexibility provisions – how easy is it *really* to adjust premiums and death benefits? What are the limits and rules?
• Understand the loan provisions, including interest rates charged and credited.

Policy Illustrations

You will receive policy illustrations showing hypothetical future values based on assumed rates of return. **For variable policies, these are highly sensitive to the assumed return rates and are NOT guaranteed.** Focus on illustrations using conservative or moderate return assumptions, and pay close attention to the guaranteed assumptions (which usually show the policy lapsing early without significant funding). Understand that actual performance will vary.

The Unmatched Value of an Independent Agent

This complex comparison process underscores the benefit of working with an independent agency like Insurance By Heroes. We aren’t limited to one company’s offerings. We can:

• Request and compare illustrations from multiple top-rated carriers.
• Explain the differences in fees, features, and investment options objectively.
• Help you understand the implications of different illustration scenarios.
• Leverage our knowledge of the market to find the carrier whose variable adjustable life product offers the most competitive structure for your specific needs and risk profile.

Our background in public service instills a deep commitment to finding the right solution for our clients, not just making a sale. We shop the market for you, saving you time and ensuring you see a range of options.

Navigating Complexity with Insurance By Heroes

Variable adjustable life insurance is undoubtedly one of the most complex life insurance products available. Its blend of insurance protection and market-linked investments requires careful navigation. The flexibility it offers is powerful but needs to be managed responsibly to avoid unintended consequences like policy lapse.

At Insurance By Heroes, we get it. Our founder, a former first responder and military spouse, built this agency on principles of trust, clarity, and dedicated service. Our team, many with similar service backgrounds, understands the weight of responsibility and the need for reliable, straightforward guidance when making crucial financial decisions for your family’s future.

We help you tackle the complexities of variable adjustable life insurance by:

• Conducting a thorough needs analysis to determine if this policy type even aligns with your goals.
• Assessing your comfort level with investment risk.
• Clearly explaining how the policy works, including all potential risks and fees.
• Obtaining and comparing quotes and illustrations from multiple leading carriers, highlighting key differences.
• Walking you through the subaccount options and the importance of the prospectus.
• Providing ongoing support and reviews to help you manage the policy effectively over the long term.

Choosing the right life insurance is too important for guesswork or settling for the limited options of a single carrier. You deserve personalized advice from professionals who put your interests first.

Ready to explore your options? Take the first step towards securing flexible, potentially high-growth life insurance coverage tailored to your life. Fill out the quote request form on this page today. Our dedicated team at Insurance By Heroes will reach out to discuss your needs, answer your questions, and leverage our access to dozens of carriers to find the right solution for you. Let our service-driven team serve you.

Conclusion: Is Variable Adjustable Life Right for You?

Variable adjustable life insurance offers a unique combination of lifelong protection, premium and death benefit flexibility, and the potential for significant tax-deferred cash value growth tied to market investments. However, this potential comes hand-in-hand with market risk, complexity, and typically higher fees than other policy types. It requires careful management and a tolerance for potential fluctuations in value.

It is not a one-size-fits-all solution. Whether it’s the right choice depends entirely on your individual financial circumstances, goals, and comfort level with investment risk. Making an informed decision requires comparing it not only against other variable policies from different carriers but also against alternatives like whole life, standard universal life, and term insurance.

Insurance By Heroes stands ready to be your trusted partner in this process. As an independent agency founded on principles of service and staffed by professionals who understand commitment, we provide unbiased advice tailored to your needs. We shop the market across dozens of carriers to ensure you find coverage that truly fits, explaining complex options like variable adjustable life insurance in clear, understandable terms. Start the conversation today by requesting your personalized quote.