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Variable universal life insurance is a permanent policy with a flexible death benefit and premiums.
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VUL policies allow you to allocate cash value into subaccounts, and then to invest that cash value in stocks, bonds or money market funds.
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Because you could lose money, a VUL policy is best suited for those with a moderate risk tolerance.
Variable universal life insurance (VUL) is a life insurance policy with a cash value component that earns interest over time. VUL is appealing to some people because both the premiums and death benefits are adjustable. These policies offer high potential growth and flexibility. But because they’re risky, they’re not suitable for everyone.
What is variable universal life insurance (VUL)?
Variable universal life insurance is a type of permanent life insurance with adjustable premiums. It pays a death benefit to your beneficiaries when you die and also includes a cash value component that you can invest in your choice of various subaccounts similar to mutual funds.
The cash value fluctuates based on how your investments perform. There’s high potential cash value growth if your investments perform well, but you could lose money if your investments fare poorly.
Variable universal life policies represent a relatively small slice of the U.S. life insurance market, making up 14% of sales by premium in 2024, according to LIMRA, a life insurance research group.
How does variable universal life insurance work?
As with any permanent life policy, part of your VUL premium goes toward the cost of insuring your life. The rest of the money is funneled into the savings component of the policy, known as the cash value.
When you buy a VUL policy, you’ll allocate your cash value into various subaccounts of your choice. You can usually invest in stocks, bonds, money market funds or a combination, depending on your goals.
The cash value isn’t guaranteed, though, and neither is the death benefit. Strong market performance can lead to greater cash value accumulation, but poor performance can reduce your cash value.
Variable UL is best known for its flexibility. You can adjust your death benefit if your insurance needs change, although increasing it may require a medical exam. If you have enough cash value, you can use the money to skip premiums or stop paying them altogether. You can also withdraw cash value or borrow against it, but keep in mind it can take 10 or more years to build up enough cash value to be able to do that.
If your cash value dips below the amount needed to cover policy costs, you may need to pay a higher premium. Otherwise, you run the risk of your policy lapsing, leaving you without life insurance coverage.
Pros of variable universal life insurance
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Flexible premiums and death benefit
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VUL policies let you adjust or even skip premium payments if you have enough cash value. You can also increase or decrease your death benefit if your needs change.
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Like other permanent policies, VUL typically lasts your entire life. Life insurance death benefits are generally tax-free.
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Potential cash value growth
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If your investments perform well, your cash value will grow and your beneficiaries could receive a higher payout. You can borrow against the cash value or withdraw it. Some people use the funds to supplement their retirement income.
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Cons of variable universal life insurance
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Risk of poor investment performance
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If your selected investments perform poorly, you could lose money. Your policy may lapse if you don’t maintain sufficient cash value.
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Requires regular monitoring
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VUL requires you to consistently monitor your investment performance and your policy’s cash value. If you prefer a hands-off approach to life insurance and finances, VUL isn’t a great choice.
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The fees on a variable universal life policy can be substantial. In addition to sales and administrative fees, you’ll also indirectly pay the underlying fund expenses for the investments you choose. Many insurers also charge a fee if you cash out the policy for its cash surrender value in the first 10 to 15 years.
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VUL could be worth considering if you want permanent life insurance and you’re comfortable having your cash value fluctuate based on market performance.
If you’re already maximizing your retirement accounts and looking for another tax-deferred investment option, a variable universal life insurance policy could be a suitable choice. This type of policy allows you to invest money in a tax-deferred account while also providing a death benefit.
Variable universal life insurance offers flexibility in terms of premiums and death benefits. The cash value of the policy grows based on the performance of investments you choose, making it different from other types of life insurance policies.
Before purchasing a variable universal life insurance policy, it’s important to work with a licensed professional who can provide guidance on both securities and life insurance. Reviewing the prospectus and life insurance illustration is crucial to understand how the policy’s cash value, death benefit, and premiums may change in different scenarios.
Due to potential life insurance commissions, it’s advisable to consider hiring a fee-based insurance consultant to review the policy objectively. This can help ensure that you are making an informed decision without any conflicts of interest.
Additionally, researching the financial stability of the life insurance company is essential. Checking ratings from reputable sources like AM Best can give you insight into the insurer’s financial strength. BW recommends choosing insurers with a rating of A- or higher from AM Best.
For more information on permanent life insurance and its various types, you can explore the original article above. following sentence using different words:
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