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One of the most popular forms of life insurance is the variable life insurance policy. With variable life, one gets permanent insurance (like whole) along with the opportunity to isolate specific investment opportunities at which premiums are directed.

One can invest in any number of opportunities with a variable life insurance plan. In essence, the insured is able to control the investment of the policy's cash value instead of relying upon the pre-established rate of return provided in a whole life solution. This makes variable life insurance very attractive to those who believe the rates of return offered by more traditional insurance policies can be easily outstripped with superior investment strategies.

However, variable life insurance policies carry with them a level of risk directly proportional to the skill of the investor and the quality of his or her decisions. Although variable policies create an opportunity for tremendous growth, they also allow a market decline to decimate the cash value of the policy. Fortunately, there is some safety net, as variable life policies will retain a death benefit that will not fall below the amount of insurance initially purchased. As such, even an errant investor cannot decimate the true insurance value of the policy, even though he or she may do tremendous harm to its cash value.

Absent consideration of the investment component, variable life policies are quite similar to whole life policies. In both cases, death benefits remain fixed, regular premiums are fixed and the insured can borrow against the cash value of the policy. Also, in both policy types the cash value accumulated by the policy is tax-deferred. The investment component inherent in variable life insurance policies requires they be considered a security by the federal government and a prospectus is issued for all variable life insurance policies. This "security" labeling does not significantly alter the behavior of the plan when compared to other insurance plans, however.

Variable policies provide an opportunity to retain appropriate levels of death benefits while having the simultaneous opportunity to invest premiums on one's own in hopes of generating a higher cash value for the policy. This creates a tremendous potential upside for variable life insurance policies, but also opens the door for potential losses in cash value depending on investment performance. Although one will not see a change in death benefits if investments fail to adequately perform, they will see a decline in cash value that can significantly reduce the policy's utility as a source of supplemental retirement income or as a means of handling financial emergency.

Alternatively, a savvy investor can use a variable life policy to create a sizeable retirement nest egg while deferring taxes until dispersal. Successful investment can produce a cash value for the policy that could conceivably dwarf the value of whole life policies. The flexibility of variable life insurance plans and the possibility of generating significant cash value gains makes them a very popular life insurance for those with the skills or insight to invest wisely.