From left to right, the basic types of life insurance policies below become more complex. Term, Whole, and Universal Life Insurance are all known as "General Account Insurance" because they are all direct liabilities of the insurance company (the death benefit and any cash accumulation are payable with the company's General Fund assets, which includes premiums paid to the insurance company and held in reserve accounts).  Variable contracts are known as "Separate Account Insurance" because the cash value is not a direct asset or liability of the insurance company, and those funds are regulated by the Securities and Exchange Commission. 

Term Life Insurance . . .

is often described as "Pure Protection", Term Life Insurance provides a death benefit for a defined length of time (the "term") such as 1, 5, 10, 15, 20 years or longer -- the longer the term, the higher the cost will be.  If the insured dies within the term of the contract -- even on the very last day -- the insurance company pays a death benefit to the beneficiary.  In this type of life insurance, there is no cash value.  The low premiums pay for the death benefit and provide some profit to the insurance company over time.  Most larger insurance companies offer at least one type of term life insurance along with their cash value policies. 

There is nothing inherently "bad" about Term Life Insurance, just as there is nothing inherently "bad" about any other type of life insurance.  It is sometime described as "temporary" as a way to make it seem inferior to a cash value policy, which will probably be described as "permanent". 

Get more protection for the same money, or have the same amount of protection as whole life insurance for less money

Term life insurance offers policyowners the ability to obtain a larger amount of death benefit for the same premium that a person might pay for a much smaller amount of cash value life insurance (whole life, universal life).  Or, conversely, a term policy will have a lower premium compared to a cash value policy of the same face amount. 

Most term policies marketed today are called "Level Term".  This means that the face amount of insurance remains the same every year.  Another form of term insurance is called "Decreasing Term" and the face amount of insurance goes down a bit every year.  Decreasing term is often used to provide the money needed to pay off a mortgage or other debt that also decreases as payments are made. 

A "Level Premium" policy is one in which the monthly premium does not change during the term of the contract.  Most Level Term policies, and nearly all Decreasing Term policies, are based on a Level Premium.  But not all policies have a level premium in all years of the contract.  For example, a Level Term policy "renewable to age 95" may only have a level premium for the first 1, 2, 5, 10, 15, or 20 years (there are a few companies now offering 30 and 40 year term policies).  You have to read the contract to know what the "rules" are. 

A disadvantage: Term life insurance will become more expensive when you renew the policy -- but only because you are older!

Nearly all term life policies are renewable at the end of the term.  Without having to prove insurability, the policyowner may continue the policy into the future for a period of one or more years.  However, the cost to continue the policy will be higher -- often three or four times higher than the original cost.  And the cost of continuing the policy could increase every year.  A policy that renews for only one year at a time is known as Annually Renewable Term ("ART"). 

Some 10- or 20-year level term life policies may be renewable for the same duration, but many transform into Annualy Renewable Term at the end of the original term, or at the end of the Level Premium period, if that is shorter than the term of the policy (some "20-year" term policies only have level premiums for the first 5, 7, or 10 years, and some are not renewable without proof of insurability at the end of 20 years).

Term life insurance is not always the right choice for every situation.  Everyone has unique needs.

Term Life Insurance is suitable for many, but not all, situations.  It is particularly valuable for younger, married couples, especially those with children, who need a large amount of income protection while they are busy raising their families, and it frees up money that would otherwise be spent on cash value insurance premiums for savings in retirement accounts and investing in stocks, bonds, and mutual funds or Exchange-Traded Funds ("ETF"). 

The low initial cost of term life insurance makes larger amounts of insurance available.  After several years of paying premiums, many term policies permit the policyowner to "exchange" or "convert" the policy into a cash value policy.  Again, without having to prove insurability, the same face amount of insurance will be available in a new Whole Life or Universal Life policy.  Because these policies have cash value, and because the insured is older, the cost of the new conversion policy will be significantly higher.  But this can be an advantage compared to renewing the term policy several years later.  You have to do the math!

Term life insurance, although less costly initially, is not the best solution for someone who knows they will have a continuing need for the protection of the death benefit.  And, on occasion, a proper life insurance "prescription" may include a combination of term and cash value life insurance.  This would be especially true of the estate planning need for life insurance, or to provide funding to business partners interested in purchasing the share of a deceased partner's interest in the business.  Locking in a lifetime premium payment in a Whole Life Insurance policy or a Secondary Guarantee Universal Life policy will be less costly over a long period of time (more than 20 or 30 years). 

An agent should discuss and understand your long-range needs before recommending any particular insurance product.  Early mistakes are very costly to correct in later years, and in some situations, corrections may not be possible at all.   Beware of agents who have only one product they are willing to discuss.  They most likely have good intentions, but they may not have the insurance product that's right for your need.

Every situation is different.  No one policy or type of life insurance will fit all situations.  The "solution" proposed by an agent should be based on a thorough needs analysis -- looking closely at income, debt, expenses, savings, and future financial goals and objectives.  A proper analysis requires substantial data gathering and several hours of "number crunching".  And it should result in a complete written report that explains what your present situation looks like, identifies areas of concern, and addresses unmet needs.

Term life insurance is sometimes referred to by agents as "temporary" insurance, as if that is a disadvantage.  These same agents will describe their cash value products as "permanent." 

The truth is cash value insurance is only as permanent as the cash value.  If you stop paying premiums, the insurance company will use your cash value to make the payments until all of it has been used up.  Then, without paying more premiums, your policy would lapse without value. 

Borrowing money from the cash value accelerates the potential for a policy to lapse.  But term life has no cash value, so it will lapse almost as soon as you miss a single payment.  With either type of life insurance, before your policy lapses, you will have a 30-60 day "grace period" in which to pay the past due premium and keep your policy in force.

I don't refer to life insurance as temporary or permanent, because neither term is truly accurate.  Not all people need life insurance for their "whole life."  But if you do, then a term life policy will not be the best choice in the long run.  It can be the most appropriate starting point, but at some later date, you will need to replace it or convert it to a cash value form of insurance.  And at that point, you may not like the cost, and purchasing a form of cash value insurance could have saved you money.  

Knowing what your long term financial needs and goals are is critical to making the right choice when it comes to your life insurance.  Only an in depth interview process will reveal that information. 

Whole Life Insurance . . .

Is the grandparent of all the various types of cash value policies being marketed today.  When it comes to understanding how the policy works, it is not a complex product, by any means.  A typical Term Life Insurance contract is about 8 to 10 pages long, and a typical Whole Life Insurance contract is only a few pages longer.  These days, both are written in understandable English -- the "legalese" of the 19th and early 20th century policies is almost entirely gone in a modern policy.  The only reason for the extra pages is the same thing that distinguishes a Whole Life policy from a Term Life policy . . . the cash value.  The extra pages describe the cash value and the rights of the policyowner in regard to the cash value. 

Think of a Whole Life policy as a very long term life contract.  It starts now, at whatever the insured's age is, and ends at that person's age 120 or 121 -- the policy's "Maturity" or "Endowment" date.  As with term insurance, the longer the term, the higher the cost will be.  But a Whole Life policy also has cash accumulation, which is additional money the policyowner contributes to the insurance company, and in return the insurance company pays a small, fixed amount of interest (between 3% and 5%) into the cash accumulation.  Because the length of the term is known, and the amount of insurance does not change, the insurance company's fixed interest rate allows the premium to be calculated in such a way that at the endowment date, the sum of the premiums paid plus the interest credited equals the full face amount of insurance. If the insured has not died by this time, the policy ends and the insurance company pays the face amount of the policy to the policyowner (the small amount of interest would be taxable).

Whole Life Insurance . . . indeed, any form of cash value life insurance . . . should never be though of as an "investment".  With its 3% to 5% rate of return, Whole Life insurance barely keeps pace with inflation.  Your investments should do far better than that.  Books written for life insurance agents 100 years ago, intended to help them develop a "philosophy" of life insurance, started with a premise similar to this:

        We must take the money from the young man, preventing him from foolishly spending that money on unimportant things, and preserve it for him until he is an old man, when he will need the money for his continued existence.

In other words, young men are too undisciplined to save money on their own, only the insurance company can do that for them.  Life in America today is not that much different than in it was the early 20th century.  People in America have much larger incomes, but they don't save any more of it today -- in fact, as a whole, we save less.  Cash value insurance is one place where money may be saved, but it's not the most efficient place or way to save.

A Whole Life policy's cash accumulation may be borrowed against, and in some policies it may be withdrawn.  When you borrow money from the insurance company, the policy's cash accumulation becomes the "collateral" for the loan.  If the loan and loan interest is not repaid in whole or in part, that amount will be deducted from the death benefit paid to the beneficiary when the insured dies.  But if the loan principal and unpaid loan interest ever exceed the cash value of the policy, the policy will lapse -- it will come to an early end. 

In recent years, insurance agents have been promoting a concept variously known as "Bank on Yourself" or "Infinite Banking" or "Safe Money Millionaire".  While technically possible, these devices advertise leveraging cash value life insurance by using the cash accumulation to fund a series of loans to pay for things like cars and college educations.  But plans such as these are dependent on large cash accumulations, scheduled repayment of the loans and loan interest, and, thus, are dependent on purchasing large amounts of Whole Life or Universal Life Insurance with very large premiums in order to build up a large cash accumulation.  Repaying the loans and loan insterest requires more money, because premiums still have to be paid. 

Some of these plans are also based on receiving "dividends" from the insurance company.  Dividends are the result of "surplus premiums" the insurance company did not need to earn its expected profit this year.  Those premiums were invested by the insurance company, and provided additional profit, so the Board of Directors decides how much it is willing to return to the policyowners.  This is not the same as earning interest in a savings account or by owning bonds.  The IRS recognizes life insurance dividends as nothing more than a return of excess premiums paid.  Some of the extra pages in the Whole Life policy discuss the options the policyowner may exercise when it comes to receiving a dividend.  The "Bank on Yourself" plans rely on dividends to purchase "Paid-Up Additions" ("PUAs") to increase both the face amount of insurance and the cash value of the policy. 

While there is nothing wrong with these plans in concept, there are some potential hazards.  First, dividends only happen when the insurance company has a profit -- which, for life insurance companies, is almost every year..  But dividends cannot be guaranteed, and they could be smaller in the future than anticipated.  The "plan" could be impaired as a result.  So while I don't disapprove of these plans, I think they have great potential to harm folks who misuse or misunderstand them. 

Additionally, and this is only a prediction at this point in time, because the federal government is spending more money than it collects in taxes and other "revenue", Congress is looking at every conceivable source of new money it can lay its hands on to try to pay those bills.  Mortgage interest deductions have already been limited for certain taxpayers beginning this year, and could be eliminated for all taxpayers in the future.  Life insurance loans are currently not taxed by the federal government either,, unless a policy lapses with unpaid loan principal or interest exceeding the total of premiums paid, minus any dividends received in cash. 

I would not be surprised if the Congress doesn't take another look at life insurance as a way to collect additional tax revenue as they did in the 1980s, either by taxing the death benefit or by taxing the unpaid loans and loan interest that is deducted from the death benefit.  If Congress does that, they don't have to "grandfather" or exempt those loans that preceded the law, so folks borrowing money from their life insurance as "tax-free income" today, could be setting themselves up for a big taxable event in the not too distant future. Again -- this is just a prediction, an educated guess. 

And for this reason, I avoid counseling folks against taking money from their retirement plans or their life insurance policies to pay their bills today, if at all possible.  If these are the only sources of readily available cash, then so be it, but they should always be regarded as the last possible resource.  Every dollar borrowed from a life insurance policy is, potentially, $1.08 or more that the beneficiary will not receive.

As long as the policyowner does not "tinker" with it, Whole life insurance is a good product, suitable for many income protection needs, and something that meets essentially all of the demands of "Truth-in-Advertising."  Its most basic premise is as simple and pure today as it was 170 years ago: 

You pay . . . you die . . . we pay.

There are very few "escapes" from any life insurance contract for the insurance company, especially once the policy becomes "incontestable" (after two years in California and most states, but after only one year in a few states).  And Whole Life, like term life, only requires that you continue to pay your premiums until the end of the term.  If death occurs before that, the insurance company promises to pay the death benefit.  It doesn't get much simpler than that.  Aside from the cash accumulation, the only difference between Whole Life and Term Life is the length of the term itself. 

An insurance company could easily offer Term Life to Age 121 with a level premium that did not change over 60, 70, 80 years or more.  They don't because it would be fairly expensive and most people would not be interested.  Yet folks do buy Whole Life insurance because of the perceived value of the cash accumulation.  Term and Whole Life insurance are one of the few thing that "you get what you pay for."  In Whole Life, you pay for the cash accumulation -- the insurance company does not give it to you free of charge. 

Universal Life Insurance . . .

is a complex product -- it always has been, from the time it was first created in the 1970s as a way for insurance companies to attract money away from bank deposits in a time of extreme inflation in America. With the potential to pay higher rates of "current interest" than traditional cash value ("Whole Life") insurance policies, UL policies "unbundle" the cost components and display them once a year on the policyowner's annual statement.  But this does nothing for most policyowners other than confuse them. 

UL . . . IUL/EIUL . . . GUL . . . SGUL . . . VUL -- it's more than alphabet soup!

Click on the Audio Link below to hear Max discuss Universal Life insurance for an Internet podcast recorded in August 2012.

Universal life, indexed/equity indexed universal life, guaranteed universal life, secondary guarantee universal life, variable universal life.  They are all essentially the same, yet each is significantly different from the other, and policies with similar sounding names from different insurance companies may not be the same at all.  Yet they are all the same in certain respects.  Like human beings, they all have essentially the same "DNA", but the assembly of the "genes" is different in each policy -- the major differences lie within each of the contracts and are not easily seen by consumers.  And many agents don't understand these differences either . . . they just sell what their managers tell them to sell, and say what they've been taught to say. 

Universal life insurance has become even more complex today, with the plethora of no-lapse guarantees and riders that attempt to overcome the inherent and common design flaws in all UL products that can, and do, lead to their collapse long before the insured dies.  When this happens, the policyowner is forced to pay considerably higher premiums or terminate the coverage and lose every penny paid in premiums, sometimes amounting to tens or hundreds of thousands of dollars.  This outcome is preventable, but not all policyowners have the financial ability to do so. 

Most folks can ill afford such costly mistakes.  Would you play a game if you did not know the rules?  And if you played a game without knowing the rules, wouldn't you expect to make some mistakes that could cause you to lose the game?  Think of life insurance along those same lines.  Your policy contains all the rules -- it's a contract between you and the insurance company.  Agents frequently fail to understand some or most (or even all) of the most important "rules", and they sometimes describe the policy as doing something it does not, or is not designed to do the way the agent explains it.  And one of the most important rules is that the insurance company or its policy may not be obligated to do what the agent says unless it also says so in the contract.

In my role as a licensed Life & Disability Insurance Analyst, I take a very close look at the language of the contract, the performance of the contract as revealed in the annual policyowner statements, and do the math needed to show how the policy is actually performing now and how it may perform in the future.  The insurance companies do not make this obvious to their clients, and the vast majority of agents do not have the skills or abilities to perform such an analysis.  Indeed, there are less than 30 licensed Life & Disability Insurance Analysts in the entire State of California.

In the vast majority of cases, analysis reveals that the premium being paid for an individual policy is wholly insufficient to maintain the policy to its maturity -- despite the fact that it's the same premium the agent told the client he or she would pay at the time the policy was issued, and the client has paid that premium every month since they purchased the policy.  Many ofmy clients say things to me such as, "So how can this be wrong?  It must be a mistake, right?" 

Wrong!  It's a failure to know and understand the "rules" of UL policies.

Older life insurance policies mature or "endow" at the insured's age 100.  All policies issued in California since January 1, 2009 must now mature at age 120 or 121., although some of these policies will not require any additional premium payments after age 100.  A traditional type of cash value policy, called "Whole Life Insurance" (sometimes referred to as "Ordinary" insurance), is designed with a level premium that does not change from the day it is issued to the day it endows.  If all the premiums are paid on time, if no money has been borrowed from the cash accumulation, and if the insured has not died by the endowment age, the policy cash value will equal the face amount of insurance at the endowment date, and the contract terminates by paying the face amount to the policyowner.  The fundamental rule in a whole life policy is rather simple:  "You pay, you die, we pay."  Policies like this have been sold in America since the 1840s.

Even though Universal Life Insurance is referred to as permanent life insurance, it is not the same as Whole Life, and the Rules of Universal Life are very different than those of a traditional Whole Life policy.  There is nothing in the contract that promises there will be as little as $1 of cash value remaining in the policy at the endowment date -- even after having paid tens or hundreds of thousands . . . even millions . . . of dollars in total premiums over 20, 30, 50, even 80 years or more.

ALL UL policies, including IUL, SGUL, and VUL, are designed with an annually increasing "Cost of Insurance" ("COI" or rate factor), based on the age of the insured, and his or her underwriting classification (Preferred, Standard, Substandard, Non-Tobacco or Tobacco User).  This is equivalent to a type of term life insurance called Annually Renewable Term, or "ART".  The rate for life insurance is based on $1,000 "units".  You multiply the number of units by the rate factor to determine what the premium is.  On top of the premium in a UL contract may be a sales charge (or "load"), and various monthly administration or expense charges, plus the cost of any riders added to the contract.

Premiums paid . . . adds current interest . . . deducts expenses   . . . equals cash value

Premiums for UL policies, after any deductions for sales charges (I've seen policies with "loads" as high as 18 percent extracted from every premium dollar paid to the insurance company) have been taken, are deposited into the "Cash Accumulation Fund" of the policy.  And from that cash accumulation all the other monthly expenses of the policy -- administration fees, the cost of riders, and the monthly Cost of Insurance based on something called the Net Amount at Risk ("NAR") -- are deducted each month, without fail.  A "formula" in the contract -- another one of the rules -- describes how the monthly COI deduction is calculated.  It will look something like this: 

The formula is

1. multiplied by the difference between 2. and 3., divided by $1,000, where

1. is the cost of insurance rate,

2. is the insured’s death benefit divided by 1.0020598, and

3. is the policy fund after deducting the expense amount and the rider charge.

Sound confusing?  It confuses your insurance agent, too. Care to do the math?  It's nearly impossible because the insurance company will not tell you what the actual COI rate is in advance.  Not even in the policyowner's annual statement.  From the statement, however, the COI rate can be "reverse engineered" to figure it out -- but only at the end of each policy year.

Nothing in the contract tells you what the actual COI factor will be in any year -- you are only shown the most it could be at any age.  In some UL policies, the COI may easily increase by 100,000% or more from the first day of the policy to the last day a premium could be paid, when the policy endows at age 121 (or age 100, if stated in the contract). 

Agents sometimes sell parents of a newborn child a UL policy on the life of the child . . . "There are so many diseases these days, you don't know what could happen to your child.  By purchasing life insurance now, you guarantee your child's future insurability, even if they develop a disease five or ten or twenty years from now." 

Have you been told this?  It's not a lie, but it's also intended to instill fear.  Those are the words sometime spoken by agents . . . and the maximum COI for a child age 3 to 10, might only be $0.02 per $1,000 of insurance per month (for a newborn or younger child it will be higher due to infant and toddler mortality statistics).  A $100,000 UL policy for a 2-year-old might only cost $10 - $12 dollars per month.  But at age 120, the last year of the policy, the COI could be as much as $83.33 per $1,000 of insurance per month, an increase of 416,550% compared to the first day's COI of just $0.02 per $1,000.  And beyond age 15, $10 - $12 per month in premiums is highly unlikely to sustain a traditional UL policy beyond age 21.

However, agents rarely describe the cost of insurance in those terms to a prospective client.  |f you knew this information, how likely would you be to buy that kind of life insurance policy for your child?

Or for yourself?  At age 25, your COI might only be $0.06 per $1,000.  At age 120, the $83.33 maximum monthly cost is a mere 138,783% increase, a relative bargain compared to the child's policy.  

There is a mitigating factor in the application of this "rule".  It is the cash accumulation.  Each dollar of cash accumulation reduces the Net Amount at Risk -- the difference between the full death benefit (the "Specified Amount") and the accumulated cash value that will be paid as part of the death benefit (reducing the amount of insurance company money that needs to be paid out -- its Net Amount at Risk). Ideally, the NAR will decrease as rapidly as the cost of insurance is increasing due to age.  But this rarely happens on its own.

For any Universal Life Insurance policy to work best, there must be a very rapid and large cash accumulation in the earliest years of the policy. The design of every UL policy permits the policyowner to pay as little as $0 each month or nearly as much as he or she can afford to pay.

The Internal Revenue Code sets a limit on the amount of cash accumulation than is permissible in the first seven years of the policy, which limits the amount of premium that can be paid.  Still, even coming close to that number cannot guarantee that the policy will survive to age 121, but it's a fair bet that the policy will endure for a very long time. 

Agents are very reluctant to discuss this because the amount of money maximum funding requires is considerably higher than most folks are willing to commit.  Instead, by using hypothetical accounting -- a straight-line interest rate that never changes, and other "current costs" that remain the same in all future years as they are today, on Day 1 -- the agent will present an "Illustration" of what the policy might  look like if all these factors worked exactly that way.  They will not.

In the nearly 40 years of Universal Life Insurance history . . . remember, the life insurance industry in American is about 170 years of age, so UL is still a "toddler" by comparison . . . those unchanging current factors have never remained constant like that -- not once! 

In the late 1970s, UL policies offered "current interest" in the range of 14% to 16% -- far more than banks were offering at 10% to 13% on CDs (at least one insurance company offered more than 20%).  But as soon as the inflation rate in America dropped back into the single digits in the early 1980s, so too did the "current interest" rates of life insurance companies (today's "current interest" rates in nearly all UL policies are at the minimum guaranteed rates of 1% to 4%). 

If your policy were built in 1978 on a never-changing rate of 15%, but in 1988 was receiving only an 8% rate, it would mean having to pay almost twice as much in premiums to grow the cash accumulation on track.  But no insurance company will tell a policyowner to do this;  the policyowner is left to figure it out for himself.  In fact, many of those 1970s and 1980s policies were sold on the basis of "vanishing premiums" -- an illustration that showed how the interest alone would pay the policy's premiums. (These "vanishing premium" illustrations are now unlawful in almost all states, yet it continues to happen even in the 2010s!) 

In the 1990s, many of the earliest UL policies began to collapse under the weight of increasing COI, decreased interest crediting, and disappearing cash accumulation value due to low or no premium payments, and the lawsuits began.  Over the next ten years, the life insurance industry paid billions of dollars in fines, penalties, and restitution to policyowners. 

And they began to create "guarantees" to try to make the policies work a little longer, and perhaps reduce the number of lawsuits.  But the guarantees are not perfect. The earliest of these simply state that paying a certain minimum premium every month will prevent the policy from lapsing -- even when there is no remaining cash accumulation -- during the first five, ten, or twenty years.  They still forced the policyowner to pay premiums over an extended period of time, despite the fact that the policy only requires one premium payment -- the first -- all the others after that, essentially, are optional.  However, if a policyowner does not have enough cash accumulation to cover all the monthly expenses in any month, the policy will fail.  So paying only one premium is unrealistic. 

The cost to keep any UL policy in force when all the cash accumulation has been depleted is enormous.  And that's why there are the "secondary guarantees" being offered today have some value.  Instead of only promising a limited period of protection against a lapse, these newer guarantees simply extend to the endowment date.  Pay your minimum premium every month, every year, and even if the cash value declined to $0 long ago -- which would have ended the policy -- the company pays the death benefit to a beneficiary.  But, this too requires the constant payment of premiums.  In many policies, missing just one premium could mean the loss of the policy -- after having paid premiums for 40, 50, 60 years or longer.  That's not a great guarantee.  But it is a guarantee. 

The SGUL policies may be a very good choice for estate planning purposes -- to leave a large amount of life insurance money, income tax-fee, to pay the 40% estate tax that some estates will be subject to beginning this year, 2013. With a plan to pay premiums without fail, minimum premiums can assure the estate will be protected for the intended beneficiaries instead of nearly half of its value being turned over to the IRS.  A policy like this will have little cash accumulation over its lifetime (none at all in later years), which is the reason premiums MUST BE PAID WITHOUT FAIL.  

Before you make a decision to purchase a Universal Life Insurance policy of any kind, be sure you know the rules.  The rules of the insurance game are written by the insurance companies.  They have to operate within the rules established by the state,.  When you play the insurance game, you have to play by the rules.  Those who do not know the rules often fall victim to them.  Occasionally, we discover that the insurance company failed to play by its own rules or those of the state.  When that happens, we may be able to help you recover some or all of your losses. 

Variable Life Insurance . . .

refers to two types of cash value life insurance which alter the nature of the contract by placing the cash accumulation in the insurance company's "Separate Account", which is a Management Investment Company regulated by the Securities & Exchange Commission (SEC) under the Investment Company Act of 1940.  The cash accumulation may be designated to and distributed among a number of "subaccounts" that closely resemble mutual funds, but are slightly different.  The Separate Account and its subaccounts invest policy cash accumulations in the stock and bond markets, where it may be subject to market risk, business risk, interest rate risk, inflation risk, and, if invested in foreign securities, government/political risk, and currency risk.  

As a security, variable insurance contracts, including variable annuities, must also be registered with the SEC, and licensed life insurance agents must also be securities licensed in order to transact these forms of insurance.  Because stock and bond investing is subject to market risk -- the day-to-day rise and fall in prices of securities, also called "volatility" -- while the insurance company makes the promise of paying the death benefit according to all of the terms and provisions of the contract, it does not assume any of the risk of loss of principal or declining cash accumulation.  That risk is borne 100% by the policyowner, who must pay attention to the performance of the separate account on a regular basis, making adjustments to and reallocating portfolio assets . . . managing the policy for the best possible rate of return, which, in some years, could mean trying to minimize losses, because a profit is not possible due to a general market decline -- such might have been the case with most variable insurance contracts in the bear market of 2008-2009, when most investors saw their portfolio values decline by up to 40% or more. 

The two types of Variable Life Insurance are Variable Whole Life (simply "Variable Life"), and Variable Universal Life Insurance ("VUL").  There are significant differences between the two.

Variable Life is designed with a fixed premium.  It has no interest rate guarantee, but it does offer the possibility of a minimum guaranteed death benefit ("MGDB").  A small portion of the fixed monthly premium goes into the insurance company's General Account to fund the MGDB, which is also a small amount of insurance, usually in the range of $25,000 to $100,000, even though the policy face amount might be $500,000 to $1,000,000 or more.  After sales charges ("loads"), administrative expenses, and any state premium taxes are deducted, the balance of the premium payment goes into the Separate Account to purchase "accumulation units" in the various subaccounts selected.  There, the funds are subject to mortality and expense charge ("M & E"), fund management expenses, and other investment expenses. .

Securities laws prevent sales charge from being excessive, but there are no limitations on administrative expenses and other policy charges.  As a result, to cover its cost of "policy acquisition" (agent commissions, underwriting expenses, other general administrative expenses), administrative charges in the first one or two years tend to be very high, significantly reducing the amount of money that actually goes into the investment component of the contract.