Types

• There are two types of variable insurance. First, variable whole life insurance provides some guarantees on your death benefit and cash value account while allowing you to invest some of the premiums. Variable universal life insurance is a variant of universal life insurance. This type of insurance allows you to vary the premiums and death benefits at your discretion along with investing 100 percent of the premiums as you wish.
  
  

Function

• Premiums are paid to the policy. In the case of whole life, the premiums are paid to the company. The company then invests these premiums into the mutual funds you choose. Any returns are credited to a cash account, called the cash value. This cash value is a savings associated with the policy that may be borrowed against for any reason.
  
  The premiums you pay to a universal life policy are paid directly into a cash value account set up for the policy. The money is invested into mutual funds you choose. Then, any gains are paid to the policy's cash value. You may borrow against the policy cash values or take a withdrawal from the account at any time.
  
  These mutual funds represent a collection of stocks, and sometimes bonds, which share a common investment objective. The stocks and bonds in the mutual fund increase and decrease in value. They are also traded by mutual fund managers for profit. Any gains that the fund managers experience are then passed to the investor. In this case, the mutual fund returns are used to increase the value of the cash reserve in the variable life insurance policy.
  
  

Benefit

• The benefit of a variable policy is that you have total control over how the money is invested. You are limited only by the available investments of the insurance company. However, you may allocate your premium dollars any way you wish. For example, you may invest 40 percent of your money in a bond mutual fund, while investing the remaining 60 percent in a stock mutual fund. You also may have several allocations. You could put 10 percent of your money into 10 different mutual funds if you wish.
  
  

Disadvantage

• The disadvantage to a variable policy is that any losses affect not only the cash value but the death benefit of the policy. Since the cash value is tied to the death benefit in variable policies, if the cash value drops to zero, you lose your entire policy. Since life insurance is meant to provide your family with money after your death, this could cause your family financial hardship if they need that money and you lose it.
  
  

Consideration

• Only invest in a variable life insurance policy if you are an experienced investor. Variable policies require that you pay close attention to the funds in of the policy every year. You may be required to make changes to your fund allocations, and you should be comfortable doing this every year. If you're not, then you should consider a fixed interest policy like an ordinary whole life insurance policy or a fixed universal life insurance policy.