Unlocking life insurance types for smarter financial planning

Variable insurance policies: What every advisor needs to know

Key insights

• Term life insurance is often described as “renting” protection, while whole life represents ‘owning’ coverage. Each approach fulfills different financial needs.
• Flexibility in premium payments can be empowering, but a lack of financial discipline may turn a valuable policy into a liability.
• Permanent life insurance isn’t just about protection: it can be a powerful, tax-advantaged tool for building wealth and providing liquidity.
• The regulatory environment for insurance-based investment products requires careful compliance, transparency, and a client-focused mindset when recommending complex insurance solutions.

Variable insurance policies blend traditional insurance protection with investment choices, offering clients both security and potential for growth. Many people find these hybrid products confusing, especially when they’re new to investment-linked insurance. As a financial advisor, you need to clearly explain how these policies work and match them to specific client needs. The goal isn’t just to know the technical details, but to translate them into simple explanations that align with your clients’ goals and risk levels.

Today’s clients are looking for ways to combine long-term protection with opportunities for growth, making variable policies both promising and complex. Effective advisors make sure clients grasp a policy’s structure, what drives its performance, and whether it truly fits their situation. The following guide will help you clarify your recommendations and build client confidence.

Understanding the different types of life insurance

Selecting the right life insurance begins with knowing the basics of each type and how they can address your client’s objectives. The major categories are term, whole, universal, and variable life insurance.

Term life insurance

Term life coverage is similar to “renting” insurance. It delivers a death benefit for a specific period, such as 10, 20, or 30 years. If the insured dies within that window, the benefit is paid; if not, the policy ends without value. Premiums are usually lower since there’s no savings element. For instance, a healthy individual might pay $25-$40 monthly for $500,000 in 20-year term coverage, compared to more than $300 per month for the same coverage under a whole life policy. Term life best serves short-term, defined needs like raising children or paying off a mortgage. However, once the term runs out, coverage stops and there’s no return of premiums.

Whole life insurance

Whole life follows the “ownership” approach. It offers lifetime protection and includes a cash value that steadily accumulates at a guaranteed, tax-deferred rate. Premiums are fixed, and a portion builds the policy’s cash reserve, which policyholders can borrow against or partially withdraw. The tradeoff is cost: whole life typically costs five to ten times more than term for equivalent coverage. The higher premium pays for lifetime coverage and guaranteed cash accumulation.

Universal and variable life insurance

Universal and variable life insurance both provide permanent coverage with added flexibility.

• Universal life lets policyholders adjust premiums and death benefits within limits. The cash value earns interest based on current rates, making it attractive for those with changing incomes.
• Variable life offers even more flexibility by allowing investment of the cash value among subaccounts, similar to mutual funds. This opens the door for higher returns, but also greater risk from market swings.

Clients who want adaptable coverage and a chance to build wealth inside their policy often choose universal or variable products. These choices fit those comfortable with risk and seeking long-term planning options, such as estate planning or maintaining lifelong liquidity.

When advising clients, match each policy to specific needs, income, and risk comfort. Term life fits time-sensitive protection, while permanent options like whole, universal, or variable life are better for ongoing needs, saving, or leaving an inheritance. Always tailor recommendations to your clients’ changing goals and financial situations.

Premium flexibility: Opportunity and responsibility

Universal and variable life policies stand out because they let clients customize payment timing and amounts. These features suit people whose incomes fluctuate, such as entrepreneurs or those paid on commission.

Unlike term or whole life, with their required payments, universal and variable products let policyholders pay more or less, provided payments stay within certain guidelines. During lean times, they can pay the minimum to maintain coverage; in better years, extra payments help grow the cash value faster.

This flexibility is helpful but requires clients to stay disciplined. Paying the bare minimum for too long can exhaust the cash value and put the policy at risk of lapsing. Research shows that flexible-premium policies are more likely to lapse, often because people overlook the ongoing costs.

To make the most of flexibility, encourage clients to review statements regularly, monitor investment results, especially with variable policies, and adjust contributions as needed. Automatic payments or reminders support consistency. Overfunding the policy creates a safety net, letting accumulated value cover payments during tougher times.

Premium flexibility is a real advantage, but only when paired with active, consistent management.

Using permanent life insurance for wealth building and liquidity

Permanent policies like whole life and indexed universal life (IUL) can deliver significant benefits beyond just risk protection. Properly structured, they can function as tax-efficient savings vehicles and flexible sources of funds through policy loans.

How policy loans work

As the cash value in a policy increases, policyholders can borrow against it, sometimes up to 90% of what has accumulated, without paying income taxes. The IRS doesn’t count these loans as taxable, since you’re borrowing your own money and not withdrawing gains. This feature gives quick access to cash for emergencies, investments, or new opportunities, often without a credit check being required.

There is interest on the loan, so it’s vital to repay or properly manage the loan balance. Allowing the loan to exceed the cash value could lead to tax issues if the policy lapses.

Overfunding and tax advantages

Some clients deliberately contribute more than the minimum, accelerating the cash value’s growth. If the policy stays below the IRS’s Modified Endowment Contract (MEC) limits, overfunding provides several benefits:

• Tax-deferred cash value accumulation
• Tax-free policy loans while the policy stays active
• Potential protection from creditors, depending on the state
• Flexibility for estate planning or emergency cash access

However, it’s crucial not to exceed IRS contribution thresholds, as that changes how the policy is taxed.

Considerations

Using life insurance for wealth building takes careful monitoring. Clients must keep an eye on outstanding loans and policy performance, since unpaid loans and interest can reduce the death benefit or cause the policy to lapse. Administrative charges and insurance costs also reduce returns and differ by carrier and policy.

On balance, permanent life insurance, when thoughtfully managed, can play a powerful role in a well-designed financial plan.

Regulations and the dual nature of variable insurance products

The regulations around insurance-linked investment products reflect their dual role as both insurance and securities. Not every insurance product is a security. For instance, term and most whole life policies are regulated solely by state insurance departments. In contrast, variable life and annuities with investment accounts are covered under both insurance and securities oversight.

This structure means advisors who sell or give guidance on variable insurance products must have both an insurance license and the appropriate securities registration, such as FINRA Series 6 or 7. This dual licensing ensures clients receive competent advice on these sophisticated products. Recent disciplinary cases have underscored the importance of proper credentials and strict adherence to compliance rules.

From a client’s point of view, the key difference is risk. Fixed insurance products deliver certainty with guaranteed benefits. Variable products tie value to the market, so clients may earn more but also face the potential for loss. It’s important for clients to review disclosures, fees, available investment selections, and risk factors that could affect their policy.

Recommendations for variable insurance should be based on a thorough assessment of a client’s needs, appetite for risk, and time horizon. Advisors have a legal and ethical obligation to stay up to date with licensing requirements and follow suitability guidelines.

Making life insurance work for you and your clients

Modern life insurance is more versatile than ever, offering options that go well beyond the simple term-versus-permanent debate. Different types are designed for specific goals, income levels, and long-term plans. Universal and variable policies, in particular, offer payment flexibility, encourage saving, and provide access to cash, all with the foundation of lifelong protection.

These features only deliver real benefits when clients are well-informed, consistent, and guided by skilled professionals. Advisors must avoid marketing these products solely as investments; transparency and accuracy are both regulatory requirements and best practices. Both clients and their advisors should focus on education and strategies that truly fit within a larger financial plan.

As insurance and financial planning continue to intersect, client-focused advice becomes ever more important. Advisors should help clients honestly evaluate their financial habits, goals, and readiness to navigate flexible insurance options. With careful selection and diligent management, life insurance can become a dynamic and valuable tool within a comprehensive financial strategy.