Universal Variable Life Insurance: What You Need To Know

Variable universal life insurance (VUL) is a type of permanent life insurance that combines a death benefit with a savings component, known as the cash value. This cash value can be invested in a range of separate accounts, similar to mutual funds, with the choice of which accounts to use being left to the policyholder. The 'variable' component of VUL refers to this ability to invest in separate accounts, while the 'universal' component refers to the flexibility the owner has in making premium payments. VUL policies offer lifelong insurance protection, flexible premiums, and access to the cash value while the policyholder is alive.

Variable universal life insurance offers flexible premium payments

Variable universal life insurance (VUL) offers flexible premium payments, allowing you to change your premium payment amount. This flexibility is a key feature of VUL, as highlighted by the 'universal' in its name. The 'variable' component refers to the ability to invest in separate accounts, similar to mutual funds, with values that vary depending on market performance.

With VUL, you have the freedom to choose how much to pay into the policy each year and when to make those payments. The payments can vary from nothing in a given month to a maximum amount defined by the Internal Revenue Code for life insurance. This flexibility is in contrast to whole life insurance, which typically has fixed premium payments that cannot be missed without risking the policy lapsing.

The flexibility of VUL premium payments is influenced by the performance of your investments. If your investments perform well, your cash value will grow, and you may be able to lower your premium payments. However, if your investments do poorly, you may need to increase your premium payments to maintain the same level of coverage.

It is important to note that VUL insurance offers increased flexibility compared to other life insurance options, but it also comes with certain risks. The return on your cash value is not guaranteed and can fluctuate with market performance. If your cash value balance is too low, you may need to pay higher premiums to maintain your coverage.

In summary, VUL insurance provides flexible premium payments, allowing you to adjust your contributions based on your budget and investment performance. However, it is essential to carefully assess the risks and potential drawbacks, such as the possibility of losing money and having to increase premium payments, before purchasing a VUL policy.

It combines a death benefit with investment options

Variable universal life insurance combines a death benefit with investment options. This type of insurance is designed to last your entire life, as long as you continue paying the insurance costs. It offers flexible premiums and cash value that you can access while you're still alive.

The death benefit is a financial payout to your loved ones when you die. This benefit can help pay for funeral expenses, ongoing expenses, or estate taxes. The cash value of your policy can be placed in variable and fixed subaccounts, depending on your risk tolerance. If there is enough money available, you may be able to take out a loan or make a withdrawal.

The investment options give you choices for potential long-term growth. The cash value inside your policy can grow or decline after you place it in a market-based investment option. Variable universal life insurance offers a wide range of investment options, including mutual funds, stocks, bonds, money market securities, ETFs, and guaranteed fixed-interest options.

The flexibility of variable universal life insurance allows you to adjust your policy's allocations to meet your growth objectives and risk tolerance. You can choose how much to pay into your policy and when, within the limits set by your insurer.

While variable universal life insurance offers the potential for investment growth, it is important to carefully assess the risks before purchasing this type of insurance. The market fluctuations can generate high returns but may also result in substantial losses. The investment risk is borne by the policyholder, and there is a possibility of losing money.

Variable universal life insurance is a complex product that is more expensive than other types of life insurance. It is important to understand the goals you are trying to achieve and how this product will support them. It is also crucial to monitor the policy regularly to ensure sufficient funding and avoid lapses.

It has tax-deferred growth potential

Variable universal life insurance (VUL) is a type of permanent life insurance that combines a death benefit with a savings component, known as cash value. The cash value of a VUL policy has the potential for tax-deferred growth, which is a significant advantage of this type of insurance.

The tax-deferred growth of cash value in a VUL policy means that the cash accumulates without incurring current income tax. This feature provides a valuable opportunity for the cash value to grow over time, potentially resulting in higher returns compared to other types of life insurance policies. The tax-deferred growth allows the policyholder to benefit from compound interest, where the returns generated are reinvested and generate further returns. Over time, this can lead to significant growth in the cash value of the policy.

The tax-deferred growth of VUL policies also offers flexibility to the policyholder. They can access the cash value by taking withdrawals or borrowing funds without paying income tax, as long as the withdrawals do not exceed the amount paid in premiums. This feature provides liquidity to the policyholder, who can use the tax-free cash for various purposes, such as funding children's education, supplementing retirement income, or investing in other opportunities.

Additionally, the tax-deferred growth of VUL policies can provide tax advantages, especially for individuals in higher tax brackets. By investing in a VUL policy, they can defer taxes on their investment returns, resulting in a higher after-tax return compared to taxable investment options. This makes VUL policies attractive to those seeking to maximise their investment returns while also obtaining life insurance coverage.

However, it is important to note that accessing the cash value of a VUL policy can have implications for the death benefit and the available cash surrender value. Withdrawing funds or taking loans against the policy may reduce the amount of the death benefit payable to beneficiaries and decrease the cash surrender value. Therefore, while the tax-deferred growth potential offers flexibility, it is important for policyholders to carefully consider their decisions regarding accessing the cash value.

It is more complex than term and whole life policies

Universal variable life insurance is more complex than term and whole life policies. Term life insurance is a temporary policy that offers coverage for a fixed period, typically 10 to 30 years. It lacks a cash value growth component and is simpler and more affordable compared to universal life insurance.

Whole life insurance, on the other hand, is a permanent policy that provides coverage for an individual's entire life. It has fixed premiums and a guaranteed cash value accumulation, which makes it more predictable and stable but less flexible than universal life insurance.

Universal variable life insurance combines the features of permanent coverage and flexible premiums. The complexity arises from its investment component, where the cash value can be invested in separate accounts, similar to mutual funds. The policyholder takes on the investment risk, which can lead to higher returns but also potential losses. The flexibility and growth potential come with higher fees and the risk of policy lapse if not properly managed.

The variable universal life insurance policy is a complex product that requires proper funding, investing, and planning to work as expected. It is important for policyholders to carefully assess the risks and understand the features and mechanics of the policy before purchasing it.

It is a permanent life insurance policy

Variable universal life insurance (VUL) is a type of permanent life insurance policy. It combines lifelong insurance protection with a savings component, called cash value. This coverage can last your entire life so long as you continue paying for the insurance costs.

VUL is distinguished by its flexibility. It offers flexible premium payments and a wide range of investment options. The 'variable' component in the name refers to the ability to invest in separate accounts, similar to mutual funds, whose values vary as they are invested in the stock and/or bond markets. The 'universal' component refers to the flexibility the owner has in making premium payments. The premiums can vary from nothing in a given month up to maximums defined by the Internal Revenue Code for life insurance.

The death benefit will be paid out if the insured dies at any time as long as there is sufficient cash value to pay the costs of insurance in the policy. There is no endowment age, which is the age at which the cash value equals the death benefit amount. This means that, unlike whole life insurance, there is no age at which the insurance company keeps the cash value built up over the years.

The cash value of a VUL policy can be invested in the financial markets, offering the potential for higher returns than other types of life insurance. However, there is also the risk of losing money. The policyholder takes on the investment risk and receives the potential returns. If the investment returns are very poor, the policy could lapse.

VUL policies are complex and are generally more expensive than other types of insurance policies. They are designed for long-term financial goals and require careful planning and management.

Frequently asked questions