The Difference Between Investing in Variable Life and Investing in Your 401K

Keith Huckerby

By Keith Huckerby | August 22, 2014

We blog a lot about how you can use the cash value of your permanent life insurance to fund many of life’s possibilities – a child’s college education, time off to care for an ailing parent, start a new business, etc. Variable life products can be an important part of that strategy, allowing you to choose how to invest and grow the cash value of your policy by selecting a portfolio of variable funds just as you might with your 401K or IRA.

But your life insurance policy is NOT a retirement account, so it makes sense that you shouldn’t pick the investments the same way as you might for your retirement. Here are three things to consider in building the portfolio in your variable life insurance policy.

Risk Tolerance.
That is, how would you react if something you invested in lost value rather than gained? Would you want to sell, hold steady or buy more? While the biggest potential upsides are often found with the riskiest investments, some people find the greater risk of loss too painful.

Since one of the key benefits of a life insurance policy is protection, you may find that you have less tolerance for risk in your insurance portfolio than you might in your 401K. And that is ok. With careful planning, your life insurance portfolio and your retirement accounts can work together. Having a relatively risk-averse position in your life insurance portfolio, for example, might provide you the freedom to assume a riskier strategy in your 401K. Personally, I tend to be more conservative in the portfolio behind my own Variable Universal Life (VUL) policy than I am in my 401K. I’m steadily building the cash value in my VUL, and it’s my life insurance, after all.

Downside Protection.
Anyone who pays the slightest attention to the stock market knows that it has its inevitable ups and downs. In a life insurance portfolio, you may want to consider selecting funds that allow you to participate in the market’s upswings while helping protect you from the downturns.

If you look over the historical performance of the market, you may find funds that tend not to go down in value quite as much as their peers. They may lose only seven or eight percent of their value while everyone else loses 10 percent, for example. Minimizing losses during a downturn — downside protection — is an important part of building cash value over the long term. Think of it this way: If your investment drops 50 percent in value, it has to go up 100 percent to get back to where it was.

Your time horizon – how long you are able to wait before you have to redeem an investment – has a tremendous influence on your risk tolerance. If you don’t require the money right away, you may be able to afford to wait out any of the market’s down cycles. If not, then you may want to be a little more conservative in your investments.

For example, if you will be using the cash value of your insurance policy to help pay for college, the child’s age will define your investment horizon. You could be more aggressive investing for a five year old’s education than you can for a child of 15. If your child is in high school, you only have a few years you can wait for the market to recover from a downturn before you would need to access the cash value from your policy.

These are just some of the things to consider when picking the investments in your variable life insurance portfolio. Your financial adviser can help you understand your personal risk tolerance and time horizon and then work together to craft a portfolio of investments that best match your needs.

All guarantees are based upon the claim-paying ability of the issuer. The values of the underlying sub-accounts are not guaranteed and are subject to market fluctuations and may lose value. Loans and other policy withdrawals will reduce the death benefit amount, may be subject to income taxes, surrender charges and a processing fee.

Investors should consider the investment objectives, risks, charges, and expenses of a variable insurance product carefully before investing. Please carefully read the prospectuses for the relevant variable insurance product and its underlying investment options, which contain this and other information about the product. You can obtain a prospectus from your Penn Mutual financial professional or go to


  • Avatar Kate Salazar says:

    Very nice article. Great read.

  • Avatar Ricky says:

    The underlying assumption in this article is that the policy is primarily as an investment, otherwise, why would I need downside protection, isn’t that the death benefit for the insurance component? Given that, cash value life is a horrible investment:

    – I give insurer premium.
    – Insurer takes part of premium to pay for life insurance coverage
    – Insurer takes what’s left and invests it something that earns a return, say 5%
    – Insurer keeps 4% and gives me a “dividend” from the remaining 1% which is entirely TAXABLE? So I am getting taxed on getting my own money back? And that’s a good investment? No thanks.

    • Keith Huckerby Keith Huckerby says:

      Thanks for your question, Ricky. This is a very common misperception, and I’m glad to have the opportunity to address it. A variable life insurance policy operates in the following manner:

      • I pay my premium to the insurance company.
      • Insurer deducts a load charge primarily to cover state and federal premium taxes, then invests the rest in portfolio accounts as designated by the policyholder.
      • Performance of the funds is credited on a tax-deferred basis.
      • Fund performance is net of monthly charges for insurance protection, policy maintenance expenses, and a provision for contingencies.
      • Taxes are only applied if the policy cash value accessed exceeds the premiums paid; otherwise, it is treated as a return of premium for income tax purposes.

      Variable life is a unique financial instrument that combines insured protection against premature death along with tax-deferred growth in policy values that can be accessed during the policy owner’s lifetime.

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