Variable Life Insurance

Variable life lets you invest part of your cash value in stocks and other securities, through mutual funds run by the insurance company. With a variable-life policy, both the death benefit and the cash value depend on the performance of the investments you choose, which can go down as well as up. There is no guaranteed minimum interest rate for the cash value, as there is with a straight universal-life policy.

You decide how much of your net premium -- that is, the amount left after commissions and other expenses are paid -- will be invested in different areas: stocks, bonds and short-term money-market funds. (Policyholders' investment funds are segregated from the insurance company's general accounts so that they reflect the actual experience of the investments chosen.) Because you decide where your money is invested and bear the risk of those investments, variable life is considered a security and is the only kind of life insurance sold by prospectus.

No guaranteed cash value

A minimum death benefit -- the policy's face amount -- is guaranteed, but your cash value is not. If your investments perform poorly over a long time, it's possible your policy could end up with a cash value smaller than what you would have achieved with a traditional whole-life policy. A poorly performing policy would represent an extremely expensive form of life insurance if you died after paying premiums for many years. On the other hand, good performance in the investment account could increase the death benefit above the guaranteed level or create a substantial cash value.

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Details of variable-life policies are spelled out in their prospectuses, which you can get from the agent or the company. This is a complex product, so read the prospectus carefully. The first year's premium is largely consumed by one-time administrative costs and the agent's commission. Thus, it takes several years to accumulate significant cash values even if the investment portion of the policy does well. Also, a variable-life policy must be watched closely after you buy it. It will be up to you to change your investments to get the best return.