Which type of life insurance policy allows the policyholder to vary premiums and sum insured based on investment performance?

The option that allows the policyholder to vary premiums and sum insured based on investment performance is universal life insurance. This type of policy is designed with a flexible premium structure, enabling the policyholder to adjust their premium payments and coverage amount as needed.

Universal life insurance stands out because it combines life insurance protection with an investment savings element. The cash value component of the policy can grow based on market interest rates or chosen investment options, giving the policyholder the opportunity to influence the growth of their cash value depending on how the investments perform. This flexibility in both premium payments and benefits is a key feature that differentiates universal life insurance from other types of life insurance products such as whole life or term life insurance.

Whole life insurance, for instance, typically has fixed premiums and guaranteed benefits, while term life insurance provides coverage for a specified period without an investment component. Variable life insurance also involves investment performance but predominantly allows varying the death benefit and cash value through investment allocations among sub-accounts. However, the specific flexibility around premiums and potential cash value adjustments in universal life insurance makes it the correct answer for this question.