Casey Bond is a seasoned personal finance writer and editor. In addition to Forbes, her work has appeared on HuffPost, Business Insider, Yahoo! Finance, MSN, The Motley Fool, U.S. News & World Report, TheStreet and more. Casey is also a Certified.
Casey Bond ContributorCasey Bond is a seasoned personal finance writer and editor. In addition to Forbes, her work has appeared on HuffPost, Business Insider, Yahoo! Finance, MSN, The Motley Fool, U.S. News & World Report, TheStreet and more. Casey is also a Certified.
Written By Casey Bond ContributorCasey Bond is a seasoned personal finance writer and editor. In addition to Forbes, her work has appeared on HuffPost, Business Insider, Yahoo! Finance, MSN, The Motley Fool, U.S. News & World Report, TheStreet and more. Casey is also a Certified.
Casey Bond ContributorCasey Bond is a seasoned personal finance writer and editor. In addition to Forbes, her work has appeared on HuffPost, Business Insider, Yahoo! Finance, MSN, The Motley Fool, U.S. News & World Report, TheStreet and more. Casey is also a Certified.
Contributor Ashlee Valentine Deputy Editor, InsuranceAshlee is an insurance editor, journalist and business professional with an MBA and more than 17 years of hands-on experience in both business and personal finance. She is passionate about empowering others to protect life's most important assets. Wh.
Ashlee Valentine Deputy Editor, InsuranceAshlee is an insurance editor, journalist and business professional with an MBA and more than 17 years of hands-on experience in both business and personal finance. She is passionate about empowering others to protect life's most important assets. Wh.
Ashlee Valentine Deputy Editor, InsuranceAshlee is an insurance editor, journalist and business professional with an MBA and more than 17 years of hands-on experience in both business and personal finance. She is passionate about empowering others to protect life's most important assets. Wh.
Ashlee Valentine Deputy Editor, InsuranceAshlee is an insurance editor, journalist and business professional with an MBA and more than 17 years of hands-on experience in both business and personal finance. She is passionate about empowering others to protect life's most important assets. Wh.
| Deputy Editor, Insurance
Updated: Sep 13, 2023, 4:47pm
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If you’re considering buying life insurance, you may be considering variable universal life insurance. But because this is a complex product, it’s important to fully understand it before you buy.
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Variable universal life (VUL) is a type of permanent life insurance, meaning the policy stays in force as long as you’re alive and continue making the necessary premium payments. It also contains a cash value component that is invested in your choice of multiple sub-accounts. If the cash value is large enough, you can use it to pay your premiums. You can also withdraw funds or borrow against the cash value.
Another feature of VUL insurance is that you can increase or decrease the policy’s death benefit to match your current coverage needs, within certain parameters. This means your premium payment can be adjusted up or down as well.
Variable universal life insurance is a type of universal life insurance. But with variable universal life, you’re able to make choices about how your cash value is invested to potentially reap greater returns (as well as assume greater risk). You can adjust the death benefit and premiums, as you do with universal life insurance.
The big difference between VUL and traditional universal life insurance is that VUL insurance gives you choices for investing. You’re able to put the cash value in various funds, much like you would with a brokerage account. The cash value in a regular universal life insurance policy usually gains interest according to money market rates.
A VUL policy is a type of permanent life insurance policy that combines some of the characteristics of variable life and universal life insurance.
VUL is a type of cash value life insurance. One of the most notable features of a VUL policy is that you can invest your cash value in the market via various sub-accounts, which act essentially like mutual funds. Sub-account options may include asset allocation funds, bonds, equity funds and index funds. There’s also generally an option for a fixed-interest account.
Your cash value can generate returns when the market is doing well or lose money if the market falls.
Like other types of permanent life insurance, you can withdraw the funds in your cash value account or borrow against your life insurance tax-free (as long as withdrawals don’t exceed the policy basis). However, if you don’t repay a policy loan, the loan balance will be deducted from the death benefit, and your beneficiaries will receive a reduced benefit.
Variable universal life insurance gives you more flexibility than other types of life insurance. You can adjust the death benefit up or down, as well as the premiums, within certain limits. This can be useful if your income varies, for example. But you’ll need to stay alert that you’re paying at least the minimum premiums needed to keep the policy in force.
Depending on the policy, you may be able to choose between a fixed death benefit and a variable death benefit. A fixed death benefit will pay out a specific dollar amount to your beneficiaries, while a variable death benefit may increase or decrease based on the cash value amount.
Once you have enough cash value built up in your policy, you can use it to pay your premiums. It’s important to ensure that enough cash value remains in the policy to cover policy charges and fees; otherwise, your policy could lapse. Some VUL policies, such as Prudential’s VUL Protector, offer a no-lapse guarantee, as long as you pay minimum premiums.
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Here are some of the main benefits of VUL insurance.
With a VUL policy, you can adjust the death benefit up and down. (You may need to undergo new medical underwriting for an increase). If your income changes, you may want to adjust the size or frequency of premium payments. VUL insurance allows you to do this, within the limits of your policy. Changing your premiums can impact how quickly you build cash value and can impact the amount of the death benefit as well.
You can receive lifelong coverage as long as you pay the premiums due.
One of the benefits of life insurance is that your beneficiaries won’t have to pay income taxes on the death benefit. With life insurance, you also enjoy tax-deferred growth on your cash value.
But you will face taxes if:
Where there are benefits, there are usually some disadvantages, too. It’s important to consider both.
The investment side of a VUL policy is much riskier than other types of permanent life insurance. While you have the opportunity to grow cash value when the market performs well, you can also lose money if the market drops.
The cash value in a VUL is not limited by caps or floors. That means there is no limit to how high your cash value earnings can be, but there is also no limit for how low your cash value earnings can be. If the cash values drop too low, you’d need to make additional premium payments to avoid a policy lapse.
VUL insurance comes with various fees, such as the cost of insurance (the actual cost of insuring your life), administrative costs and other charges. If your policy has high internal charges, they will eat into the amount that goes to your cash value and ultimately reduce your potential investment growth,
Though VUL insurance allows you to earn greater returns through market exposure, there are limitations to your investment choices and growth. If growing your wealth through investing is a top goal, you may be better off putting your money in a tax-advantaged retirement savings vehicle—such as a 401(k) or IRA—or even a taxable brokerage account.
As a standalone investment, VUL probably won’t match the returns you’d experience by investing in the market directly. This is largely due to the fees involved, including the cost of the insurance. It’s also riskier than other types of life insurance since your investments can negatively impact your death benefit and premiums.
However, if you’ve already maxed out your available retirement funds, VUL could be a good supplement to your retirement savings while also providing a financial safety net to loved ones.
One of the major downsides to variable universal life insurance is that your cash value can decrease if the underlying investments underperform. You could lose previous gains as well as your initial investment.
VUL death benefits are generally not guaranteed. Your death benefit may be at risk if the policy’s cash value drops too low and the policy lapses. But if all necessary premium payments are made on time, and the policy doesn’t lapse, the death benefit will stay in place.
Before you commit to a VUL policy, consider these alternatives, which may better meet your needs.
If you’re looking for lifelong coverage with some flexibility, indexed universal life insurance (IUL) is worth consideration. With an IUL policy, you can typically adjust the death benefit and premiums within certain limits. Cash value is tied to a stock market index, like the S&P 500 or a combination of indexes, including the option of a fixed-interest investment.
IULs have participation rates, caps and floors. They also have potentially high policy fees and charges, which are paid out of your premium payments. Whatever is left of the premium payment goes into cash value.
If you’re interested in a more simplified form of permanent life insurance, there’s whole life insurance. The best whole life insurance companies offer a guaranteed death benefit, fixed premiums and a guaranteed rate of return on your cash value. However, your cash value gains will likely be lower than with other types of permanent life insurance.
Guaranteed universal life insurance provides a guaranteed death benefit and fixed premium payments. You choose the age at which the policy expires (such as age 90, 95, 100, 105, 110, or 121). The higher the age, the higher the premiums. It’s the cheapest form of universal life insurance you can buy and has little cash value.
If you’re looking for affordable life insurance coverage during the years when your financial obligations are highest, term life insurance may be your best option.
Rates are level for a specific term (usually 10 to 30 years). If you die during that period, your beneficiaries receive a death benefit. Once the level term expires, most term life policies include the option to renew yearly, but the premium increases significantly. Term life insurance is considerably less expensive than permanent life insurance. However, there is no cash value component.
The premiums you pay are only one cost to consider if you’re buying a VUL policy. Be aware of the monthly charges, such as the actual cost of insurance (the component that insures your life) and policy fees. If you buy a high-free VUL, less of your premium payments will be going toward cash value. You’ll have less cash value to withdraw or borrow from.
A VUL policy with low premiums but high internal charges isn’t a good buy.
According to data from Veralytic, a provider of life insurance analytics, Protective, Midland/North American, Minnesota Life and Pacific Life are among the most cost-competitive companies for variable universal life insurance.
Make sure to look at the guaranteed parts of the VUL policy, as shown in the policy illustration. Don’t buy any life insurance based on the rosy picture painted by non-guaranteed parts of the illustration.
An experienced financial advisor can help you understand the potential worst-case scenarios of the policy, in case your investments tank.
According to data from Veralytic, Ameritas, New York Life, Northwestern Mutual and Protective are among the companies with the most reliable policy illustrations for variable universal life insurance products.
Financial strength ratings indicate the insurer’s ability to pay claims many years down the road. Ratings agencies include AM Best, Moody’s and Standard and Standard & Poor’s.
MassMutual, Minnesota Life, New York Life and Northwestern Mutual are examples of companies that have long histories of top financial strength, according to data from Veralytic.
If you’re considering buying a complex product like variable universal life insurance, it’s very important to work with a financial advisor or experienced life insurance agent who understands VUL and can explain it.
Understand what kind of active role you’ll need to take in managing the sub-account investments.
In addition, financial advisors can buy analytical reports from Veralytic that will compare the life insurance policy you’re considering against benchmarks of other VUL policies. This can help you understand where your policy falls in terms of cost competitiveness, reliable policy illustrations, financial strength of the insurer and more.
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ContributorCasey Bond is a seasoned personal finance writer and editor. In addition to Forbes, her work has appeared on HuffPost, Business Insider, Yahoo! Finance, MSN, The Motley Fool, U.S. News & World Report, TheStreet and more. Casey is also a Certified Personal Finance Counselor. Follow her on Twitter @CaseyLynnBond.
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