Universal Life Insurance: Variable Benefits, Variable Risks

Variable universal life insurance is a type of permanent life insurance that combines lifelong insurance protection with flexible premiums and a cash value component that can be invested in the market. This type of insurance offers the potential for higher returns but also comes with greater risk. Variable universal life insurance is similar to universal life insurance but offers more flexibility in terms of investing and altering the insurance coverage. It is important to carefully assess the risks before purchasing this type of insurance as there is a possibility of substantial losses.

Pros and cons of variable universal life insurance

Variable universal life insurance is a type of permanent life insurance that combines a death benefit with a savings component, known as cash value. This coverage can last an entire lifetime as long as the insured continues to pay the insurance costs. Variable universal life insurance allows for flexible premium payments and the potential for cash value growth through market investments.

Pros of Variable Universal Life Insurance

Variable universal life insurance offers several benefits, including:

• A death benefit that is often income tax-free.
• The potential to grow your money tax-deferred.
• Flexible premium payments, allowing you to adjust the amount and timing of contributions within certain limits.
• The ability to adjust the coverage amount to increase or decrease the size of the death benefit.
• Customization options to tailor the policy to individual needs, goals, and risk tolerance.
• The potential for higher returns compared to traditional life insurance policies due to market-based investments.
• Tax advantages, such as tax-deferred growth on cash value and tax-free death benefits for beneficiaries.
• The ability to supplement retirement income by accessing cash value through withdrawals or loans.

Cons of Variable Universal Life Insurance

However, there are also several drawbacks to variable universal life insurance:

• Complexity: These policies are more complicated than term or whole life policies, making them challenging to understand and manage.
• Higher premium payments: Variable universal life insurance typically has higher contract charges and investment fees, resulting in higher funding contributions.
• Long-term commitment: These policies are designed for long-term financial goals and are not suitable for short-term investing.
• Market risk: Investments in subaccounts carry the risk of poor performance, which can lead to losses and a potential decrease in the cash value and death benefit.
• High fees: Variable universal life insurance often comes with high fees due to the combination of life insurance and investment components.
• Surrender charges: There may be penalties if you cancel the policy within a certain period (typically up to 15 years) after purchase.
• Potential loss of principal: Unlike traditional life insurance, variable universal life insurance does not guarantee a fixed cash value, and there is a risk of losing money.

Variable universal life insurance vs. variable life insurance

Variable universal life insurance and variable life insurance are types of permanent life insurance policies that offer investment opportunities to the policyholder. They are designed for people who want to actively manage their life insurance and are willing to take on the risk of investing in the stock market. While both types of policies have their similarities, there are also some key differences that set them apart.

Variable life insurance was introduced in the late 1970s to allow insurance companies to compete for investment dollars. It is a permanent life insurance policy with a fixed death benefit, meaning the amount paid out to beneficiaries upon the policyholder's death remains the same. Policyholders can invest their premiums in securities such as stocks, bonds, mutual funds, or international funds, offering the potential for greater returns than traditional whole life insurance policies. The death benefit and cash value of a variable life insurance policy depend on the investment success of the separate account chosen by the policyholder. There is no guaranteed cash value, and the cash surrender value depends on investment performance. The death benefit, however, cannot fall below the face value of the policy. Variable life insurance policies typically have fixed premium payments that remain the same over the life of the policy.

Variable universal life insurance, on the other hand, offers more flexibility. Policyholders can adjust their premium payments and death benefit amounts. It combines the characteristics of variable life insurance and universal life insurance, providing the policyholder with control over their investments. The insurer does not guarantee any interest rate or cash value, unless the money is invested in a fixed-income account. Variable universal life insurance policies typically offer a range of investment accounts with different risk levels and profit potentials, such as stock funds, bond funds, and international funds. While variable universal life insurance policies do not guarantee a death benefit, most policies will provide a minimum death benefit if the policyholder pays a minimum premium.

Both variable life insurance and variable universal life insurance have their advantages and disadvantages. Variable life insurance offers more investment options and greater cash value accumulation potential than traditional whole life insurance policies. It also provides the option of a fixed death benefit, ensuring that beneficiaries receive a minimum payout. However, it is more expensive than standard life insurance due to administration and investment management fees. It also carries the risk of losing value if the investments perform poorly, and surrender charges apply if the policy is withdrawn early.

Variable universal life insurance offers even greater flexibility, allowing policyholders to adjust their premium payments and death benefit amounts. It provides access to a variety of investment options and the potential for tax-deferred cash value growth. Policyholders can also take out tax-free loans against the policy's cash value. However, similar to variable life insurance, variable universal life insurance is more expensive than standard policies due to the additional features and benefits offered. The cash value can decrease if the underlying investments lose value, and policyholders may need to pay more to maintain the desired death benefit amount.

Variable universal life insurance vs. universal life insurance

Universal life insurance and variable universal life insurance are two types of permanent life insurance that offer financial security for your loved ones after you pass away. Both types of insurance have flexible premiums, meaning you can fund your life insurance more or less generously depending on your life circumstances. However, there are some key differences between the two.

How Universal Life Insurance Works

Universal life insurance allows you to build cash value by making premium payments and earning interest at a rate that can change but has a guaranteed minimum. One of the key features of universal life insurance is that you can adjust the size or frequency of your premiums to build cash value more quickly or slow down if your budget demands it. The cash value you accumulate grows tax-deferred within your contract, and you can take out loans or make partial surrenders without being taxed, provided your life insurance doesn't qualify as a modified endowment contract. Additionally, universal life insurance offers a tax-free payment to your beneficiaries when you die.

How Variable Universal Life Insurance Works

Variable universal life insurance operates similarly to regular universal life insurance, except that instead of earning a minimum interest rate on your cash value, you invest it in market subaccounts such as mutual or index funds. This means that if the market performs well, your cash value may grow, but if the market does poorly, your life insurance may lose value. You have control over the investment allocation by selecting from the subaccounts offered by your insurance provider. Variable universal life insurance also offers tax-deferred cash value accumulation and tax-free loans.

Similarities Between Universal and Variable Universal Life Insurance

Both universal and variable universal life insurance offer permanent protection, cash value accumulation, adjustable premium amounts, and tax-deferred growth. They also both carry the risk of losing the death benefit if the cash value is not sufficiently maintained.

Differences Between Universal and Variable Universal Life Insurance

The main difference between universal and variable universal life insurance lies in the investment options and the resulting risk, fees, and complexity. Variable universal life insurance allows you to choose your own investments, while universal life insurance does not. This gives you more control over your investments but also exposes you to the risk of losing principal if the market performs poorly. Variable universal life insurance may also have more fees due to the investment option and may be more complicated due to the investment component.

The choice between universal and variable universal life insurance depends on your individual needs and preferences. Universal life insurance may be better if you want someone else to decide how to invest your money and prefer the guaranteed minimum interest rate. On the other hand, variable universal life insurance may be better if you are comfortable with investment risk and are seeking greater growth potential for your cash value. It ultimately depends on your financial goals and risk tolerance.

Tax advantages of variable universal life insurance

Variable universal life (VUL) insurance offers several tax advantages. Firstly, your beneficiaries typically do not have to pay federal income taxes on the death benefit they receive from your policy. Secondly, the cash value of your policy grows tax-deferred, meaning you don't owe federal taxes until you withdraw money from the policy. If you do access the policy's cash value, you usually won't pay any income taxes until the total withdrawals exceed the amount you've put into the policy. Finally, you can take out a loan against the cash value of your VUL policy, and this loan is tax-free. However, any unpaid loans, including principal and interest, will reduce the death benefit.

Who is variable universal life insurance best for?

Variable universal life insurance is a permanent life insurance policy that allows for growth. The cash value of a variable universal life policy can be invested to grow the value of the account. It is a mix of insurance and investing, and it is supposed to help you take care of your family and your future.

Variable universal life insurance is best for those who are comfortable with proactively managing their investments. Because VUL involves market investments, there is some market risk. Those who are risk-averse may wish to investigate other life insurance options.

Variable universal life insurance is also best for those who want to provide for their loved ones after their death and grow their cash value at the same time. Due to its cash value potential, a VUL can be a way to complement your retirement nest egg while also having the life insurance coverage you need.

Variable universal life insurance is also best for those who want to have control over where they want to allocate the cash value portion of their policy for greater earning potential. However, it is important to note that VUL is more complex than most other forms of life insurance and should be monitored closely throughout the life of the policy.

Frequently asked questions