Variable Life Insurance offers both a cash value and insurance coverage, however, the cool thing about this policy is that the cash value is actually separated in an investment account (although the insurance company is in charge of the account’s administration and collects a fee) where the policy owner can choose where to invest the policy’s cash value.
Thus, the owner of variable life insurance can invest the policy’s cash value investments similar to a mutual fund, stocks, bonds, government securities, and more, and the cash value has more protection as it is not subject to claims by the insurer’s creditors.
The trade-off is (1) the policy owner carriers the investment risk, (2) there is no guaranteed minimum earning percentage (or minimum return) by the insurance company (since they are not investing the cash value in their own), and (3) the insurer still collects administrative fees, which makes this type of policy more expensive. This being said, costs of variable life insurance policies are typically offset by higher investment yields.
NOTE: Although a TOLI avoids this issue since the settlor can select a viable trustee, Variable Life Insurance is not appropriate if the owner cannot monitor investments, has a low-risk tolerance, and does not intend to hold the policy for at least 10 years.
