Variable universal life (VUL) insurance provides lifelong insurance protection coupled with flexible premiums and accessible cash value while you’re alive. With VUL insurance, you can invest and grow the cash value through subaccounts resembling mutual funds. Engaging with market fluctuations can yield high returns and also substantial losses.
VUL is akin to variable life insurance but distinguishes itself by allowing adjustments to your premium payments. Despite the increased flexibility and growth potential, it’s essential to consider the associated risks before purchasing VUL insurance.
Key Takeaways
- VUL insurance is a type of permanent life insurance policy that aims to produce greater returns through investments.
- It allows cash value investment in the market via subaccounts, similar to universal life insurance policies.
- Returns on the cash component are not guaranteed annually, and there is a potential for loss.
- Low cash value balance may necessitate higher premiums to maintain the policy.
How Variable Universal Life (VUL) Insurance Works
Variable universal life is a type of permanent life insurance policy, combining a death benefit with a savings component known as cash value. This coverage can last your entire lifetime as long as you continue covering the insurance costs. A VUL enables adjustments in annual policy payments similar to traditional universal life insurance.
You have to pay enough annually to cover ongoing insurance costs. The insurer will deduct these from your premiums, with the remainder going towards your policy’s cash value.
Investment Risk and Cash Value
In a VUL, you have the option to invest your cash value among various subaccounts. The interest and future growth are contingent on investment performance. Successful investments and rapid growth of cash value are inherently tax-deferred, and policyholders can access this via withdrawals or loans.
With poor investments, cash value growth slows and can result in monetary losses. Significant losses may require higher premium payments to cover insurance costs and rebuild cash value to prevent policy lapse and loss of insurance protection.
Unlike whole life insurance, the life insurer transfers the investment risks of the VUL cash value to you.
VUL Subaccounts
Subaccounts in a VUL function like a family of mutual funds with varied stock, bond accounts, and a money market option. Some policies limit the number of allowed fund transfers, charging fees for excess transfers and changes in investment strategy.
Besides standard administration and mortality fees, subaccounts also have management fees (ranging from 0.5% to 2%). Given the securities nature of these subaccounts, selling a VUL requires the insurance representative to be a licensed producer registered with relevant authorities.
Pros and Cons of Variable Universal Life Insurance
| Pros | Cons |
|---|---|
| Control over cash value investments | Risk of cash value losses |
| High growth potential | Possible increase in premiums |
| Flexible premiums | High fees and charges |
Pros of VUL Insurance
Choosing how to invest your cash value lets you align investments with your risk tolerance and objectives. Successful investments can expedite cash value growth beyond other types of permanent life insurance. VUL insurance, being a form of universal life insurance, also allows premium payment adjustments to suit your budget.
Cons of VUL Insurance
However, VUL insurance comes with inherent risks and drawbacks. There’s no guaranteed return on the cash value, meaning poor investment performances can lead to financial losses. Insufficient cash value to cover insurance costs demands increased premium payments to avoid losing insurance protection.
VULs generally have high fees due to combined charges for life insurance and investments. Also, a VUL may include a surrender charge with penalties for policy cancellation within the first 15 years—potentially amounting to 10% or more of your cash value.
Suitability and Alternatives
A VUL could be suitable if you seek permanent life insurance protection, have a higher risk tolerance for investing, and prefer self-managing investments. For those who have maxed out other retirement accounts, using a VUL for additional tax-deferred investment growth might be worthwhile. While VUL offers higher growth potential, it’s more complex and riskier. Consider these alternatives:
Variable life: Similar market investment through subaccounts, but without premium payment adjustments; maintains a minimum death benefit contingent on continued payments.
Universal life: Adjustable premiums with cash value growing based on market interest rates, guaranteeing a minimum growth rate and eliminating loss risk.
Whole life: The safest option with fixed premiums, guaranteed death benefits, and fixed cash value returns, though growth potential is lower.
Term life: Offers temporary life insurance protection with substantially lower premiums and no cash value accumulation, redirecting saved insurance costs into other investments.
Frequently Asked Questions about VUL Insurance
What Is VUL in Insurance?
VUL stands for variable universal life insurance, a variation on standard universal life policies allowing cash value accumulation to be invested in the market for returns.
Is VUL a Good Investment?
As an insurance product, VUL may enhance returns during bull markets. However, as a standalone investment, its performance cannot match direct market investments due to associated fees and underlying insurance costs.
What Can VUL Policies Invest In?
Investment options for VUL policies typically include stocks, bonds, money market securities, ETFs, mutual funds, and a guaranteed fixed-interest option, varying across insurance companies.
Conclusion
Variable universal life insurance intertwines lifelong insurance protection with an investment account. Suitable for those accepting higher risks for potential cash value growth, VULs entail high fees and complex management. Before committing, thoroughly compare other life insurance and investment alternatives.
Related Terms: whole life insurance, term life insurance, universal life insurance, variable life insurance.
References
- Thrivent. “How Variable Universal Life Insurance Works”.
- U.S. Securities and Exchange Commission. “Investor Bulletin: Variable Life Insurance”.
- Allstate. “What Is Variable Universal Life Insurance?”
- Harbor Life Settlements. “What Is Variable Universal Life (VUL) Insurance?”
- Financial Industry Regulatory Authority. “Insurance”.
- Life Settlement Advisors. “What Happens When You Surrender a Life Insurance Policy?”
