Variable Universal Life Insurance - What Is It? - Zupnick Associates

(by Jordan Johnson)

Variable universal life insurance is a permanent and flexible life insurance policy with an investment option different from other permanent life policies.

This article will cover some of the pros and cons of variable universal life policies and the key differences between variable and universal life insurance, as well as other popular policies.

What Is Variable Universal Life Insurance?

Variable universal life insurance (VUL) is permanent life insurance with both a death benefit and a cash value element, much like many other permanent life policies.

The difference, however, is that the investment of the cash value element is directed by the policyholder and doesn’t have a guaranteed return or growth cap.

That generally takes the risk away from the insurance carrier and puts it on the policyholder. Just like regular investing, a strategy can be developed to match the desired level of risk vs. return, but the policyholder should plan for the possibility of negative returns.

Universal life policies also offer payment flexibility, allowing the policyholder to use the cash value accumulated in a policy to pay for future premiums.

Flexible payments can be ideal if you come across hardship at any point in your life and can’t afford to pay the premiums.

What Is Meant by Permanent Life Insurance?

Permanent life insurance is intended to last a lifetime, as opposed to term life, which is for a set amount of time, up to a maximum of around 30 years.

The idea behind this kind of policy is that the premiums for the death benefit, which typically rise as the insured ages, will be offset by the growth of the cash value element.

While whole life and universal life insurance policies guarantee a rate of return for the cash value element, interest rates can often be poor. Therefore, those considering policies with guarantees should think about how high inflation rates might affect the actual value of their policy.

Cash Value Investments

So, with cash value investments being the key differentiator between the two main types of universal life insurance, let’s touch on some of the features of having a separate investment account:

  • Investments are tax-deferred, so you can adjust your portfolio without messing with your tax return each year.
  • The death benefit remains intact as long as premiums are paid.
  • Cash may grow faster in a VUL policy, as investment returns are not capped or guaranteed.
  • Policyholders undertake higher risk.
  • The policy may require higher payments to meet premiums if the investments perform poorly.

You can also borrow money against the total amount of premiums paid into the policy and withdraw cash from it. These types of life insurance policies are useful retirement investment accounts if your IRA (individual retirement account) or 401k is maxed out. 

Who Qualifies for Variable Universal Life?

Almost everyone who wants a variable universal life insurance policy must go through an underwriting process that will include a medical check. This determines their risk factor for the insurance carrier and ultimately decides the starting price of your premiums.

Those at an advanced age may find that they may not pass the required medical examinations, which can get tighter as you age.

Younger people and those without serious medical conditions will find their premiums to start fairly low. In contrast, those who are older or have unhealthy habits such as smoking will find that they must pay a higher premium.

How Permanent Life Policies Change Over Time

As the insured ages, the cost of the premium goes up. Each year, the cost of your premium could rise between 5% and 12%, unlike term insurance, which generally costs the same each year but starts at a higher rate. 

Variable Universal Life Policies at a Glance

  • Policies contain both a death benefit and an investable cash value element that will be awarded to the beneficiary upon death.
  • Payments are flexible with minimum and maximum premiums that can be paid out of the cash value element.
  • Earnings are not capped nor guaranteed; the growth of the investment account relies solely on the investments.
  • Investment accounts are tax-deferred, making your tax return a little easier when you rebalance your portfolio.
  • The death benefit element is guaranteed as long as premiums are paid.

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