Variable Universal Life Insurance: Worth The Investment?

Variable universal life insurance is a type of permanent life insurance that offers flexible premium and death benefit options, as well as the ability to invest the cash value. It is a complex product that combines life insurance and investment features, providing lifelong coverage and the potential for cash value growth through investments. While it offers flexibility and growth potential, it also comes with higher fees, investment risk, and complexity compared to other types of life insurance. In this article, we will explore the pros and cons of variable universal life insurance and help you decide if it is worth considering for your financial needs.

Variable universal life insurance pros and cons

Variable universal life insurance is a permanent life insurance policy that offers a death benefit and the potential for cash value growth through investment funds. It is a complex product that combines the features of life insurance and an investment vehicle, providing flexibility and growth potential but also carrying a higher level of risk. Here are some of the pros and cons of variable universal life insurance:

Pros:

• Death benefit: It offers a death benefit that won't decrease as long as minimum premium payments are made on time.
• Flexible premium payment options: Policyholders can adjust the amount of the premium instead of paying the same amount each year, allowing them to increase or decrease their payments based on their financial circumstances.
• Potential for higher returns: Variable universal life insurance offers the potential to earn higher returns compared to other types of permanent life insurance due to its investment component.
• Self-directed control: Policyholders can maintain a certain level of control over how their cash value is invested and can allocate their investments according to their individual risk tolerance.

Cons:

• Higher fees: The fees associated with variable universal life insurance may be higher than those of other types of permanent life insurance policies.
• Complexity: Variable universal life insurance is more complex than most other forms of life insurance and requires detailed monitoring to ensure the policy remains active and meets the policyholder's goals.
• Risk of loss: The cash value of the policy is subject to market risk, and poor performance of investment options can lead to a decrease in the policy's cash value.
• Surrender charges: These policies typically include a "surrender period", during which policyholders are charged a fee for canceling the policy early. These surrender charges can be very high, especially in the early years of the policy.

How variable universal life insurance works

Variable universal life insurance is a type of permanent life insurance policy that combines a death benefit with a savings component, known as the cash value. This coverage can last an entire lifetime as long as the premium is paid.

Variable universal life insurance is flexible. It allows the policyholder to adjust the amount of the premium instead of paying the same amount each year. In some years, the policyholder may wish to pay more than the policy requires to build more equity. In other years, they may need to pay less due to emergencies or unexpected expenses.

The cash value of a variable universal life policy can be invested to grow the value of the account. The policyholder decides where the cash goes, choosing investment options based on their preferred level of risk. The cash value grows tax-deferred, meaning the policyholder does not owe taxes until they make withdrawals.

The variability in a variable universal life policy comes from the ability to change the death benefit amount throughout the life of the policy. As life circumstances change, the benefit can go up or down depending on needs. There is no minimum death benefit in a variable universal life policy. The policy's premiums become more expensive as the death benefit rises and less expensive as it decreases.

The money put into a variable universal life policy covers the death benefit's current value, the fees associated with the policy itself, and the running of the account. The remainder goes towards the cash value of the policy, which is held in a sub-account or multiple sub-accounts. Variable sub-accounts let the policyholder invest in one of the policy provider's approved vehicles, typically a mutual fund. Fixed sub-accounts provide a guaranteed rate of return and are best for the most risk-averse policyholders.

Variable universal life insurance is not the same as variable life insurance. A key difference is that variable universal life policies have flexible death benefit amounts, whereas variable life policies have fixed death benefits.

Who variable universal life insurance is for

Variable universal life insurance is a type of permanent life insurance that offers flexible premium and death benefit options, as well as the ability to invest the cash value. This type of insurance is best suited for individuals who:

• Are looking for a flexible policy: Variable universal life insurance allows individuals to adjust their premium payments and death benefit amounts. This flexibility can be beneficial for those who want their life insurance policy to adapt to their changing life circumstances and financial situation.
• Want a hands-on investment approach: This type of insurance is ideal for those who are comfortable proactively managing their investments. Individuals can choose how the cash value of their policy is invested, allowing them to take advantage of market growth and potentially earn higher returns compared to other types of permanent life insurance.
• Are high-net-worth individuals: Variable universal life insurance is particularly attractive to high-net-worth individuals who are already maximising their traditional retirement options, such as 401(k) and IRA. It provides them with an additional tax-deferred investment account and the potential for greater returns.
• Are comfortable with risk: Due to the variable nature of the policy, individuals should be comfortable with the risk of market fluctuations. While there is the potential for high returns, there is also the possibility of substantial losses. Therefore, this type of insurance is more suitable for those with a higher risk tolerance.
• Need permanent life insurance protection: Variable universal life insurance provides lifelong coverage as long as the premiums are paid. This makes it a good option for individuals who want to ensure their loved ones are financially protected throughout their lives.

Variable universal life insurance vs. other types of insurance

Variable universal life insurance is a type of permanent life insurance that combines lifelong insurance protection with flexible premiums and a cash value that can be accessed while the policyholder is alive. It is similar to variable life insurance, but it allows the policyholder to change the premium payment amount. Both types of insurance rely on mutual fund-like subaccounts that the policyholder can choose. This means more risk and more potential for growth compared to other permanent insurance options, like whole life or universal life insurance.

Variable life insurance is a permanent life insurance policy with a fixed death benefit: the amount paid when the policyholder dies. It offers a fixed premium and investment flexibility, making it ideal for those who seek long-term financial security and growth potential.

Universal life insurance is also a type of permanent life insurance. It has unpredictable interest rates that change based on the market. It is unique because the policyholder can use the cash value growth toward premium payments. If there is enough cash value growth, the policyholder may not need to pay any premiums.

Whole life insurance is the safest option among these types of insurance. It charges the same fixed premium and has a guaranteed death benefit and a fixed cash value return. In exchange for safety, it has the lowest growth potential.

Term life insurance is temporary life insurance protection. These policies charge much lower premiums than permanent life insurance. Term life policies do not build cash value.

The risks of variable universal life insurance

Variable universal life insurance is a type of permanent life insurance that has a flexible premium and death benefit and options to invest the cash value. However, there are several risks associated with this type of insurance that potential policyholders should be aware of.

High Fees and Charges

Variable universal life insurance policies can come with a range of fees that eat into the cash value of the policy. These include mortality and expense fees, fees to the mutual funds that premiums are invested in, and insurance-related fees. There may also be fees for additional transfers and changes to the investment strategy if the policyholder exceeds the number of free transfers allowed per year.

Surrender Charges

Variable universal life policies typically include a "surrender period", during which the policyholder is charged a surrender fee for cancelling the policy. The length of the surrender period varies by carrier but can be as long as 15 years, and the fee can be as high as 10% or more of the cash value balance.

Investment Risk

The cash value of a variable universal life insurance policy is invested in the market, and the return is not guaranteed. Policyholders pick how to invest their cash value, and the growth of the cash value depends on the performance of these investments. If the investments perform poorly, the cash value may decrease, and it is possible to lose money. If there is not enough cash value to cover the policy expenses, the policy may lapse, and the policyholder could lose their insurance protection.

Complexity

Variable universal life insurance is more complex than most other forms of life insurance and requires detailed monitoring. Policyholders need to actively manage their investments and be comfortable with the risk of loss that comes with investing in the market.

Premium Payments

Variable universal life insurance policies offer flexible premium payment options, and policyholders can choose to pay more or less than the required premium in a given year. However, if the cash value of the policy decreases due to poor investment performance, the policyholder may need to make large payments to keep the policy active.

Frequently asked questions