What Is Variable Universal Life (VUL) Insurance?
Life insurance is basically a contract between you and a life insurance company. In the contract (“policy”) you make one or more premium payments, and in return the life insurance company is bound by the policy to pay the death benefit to the beneficiaries when the insured person dies.
Variable universal life insurance has these major characteristics:
•It’s life insurance
•It may provide lifelong coverage until its maturity date (unless allowed to lapse —more on that later)
•It has a flexible premium payment structure
•It may provide cash value
•It provides the policyowner with the ability to direct premium payments to various
variable investment options
•Cash values vary with the performance of the variable investment options and the owner assumes the investment risk for amounts allocated to the variable investment options,
along with potentially greater returns.
Let’s look at each of these features in detail.
It’s life insurance
VUL has variable investment options that may help generate cash value under the policy. The cash value can be an important part of a retirement plan. But it is fundamentally a life insurance policy used to protect and provide for those who may be financially dependent on the insured’s life.
It may provide lifelong insurance coverage
Unlike term insurance, where, when the term of the policy is up, you must buy a new policy or renew the term, VUL may provide lifelong insurance coverage. The only way VUL insurance coverage stops is if the policy lapses. Unless it lapses it stays in effect until the death of the insured and then pays a death benefit to the beneficiary or until the maturity date of the policy, whichever comes first. It can lapse if sufficient premium payments are not made.
It can also lapse if, in later years, there isn’t enough in the cash value of the policy to cover the monthly policy charges. (Please note that a sufficient payment into the policy at that time can prevent a lapse.)
It has a flexible premium payment and death benefit structure
Like universal life insurance, VUL insurance allows you as the policyowner to determine the amount and frequency of premium payments and adjust the death benefit up or down, each depending on your needs and certain conditions, limits and underwriting requirements that may apply.
It may provide cash value
Beyond whatever guaranteed death benefit that may exist, a VUL policy has a cash value feature. Cash value may accumulate from premiums you pay in excess of the policy charges (like cost of insurance or expense charges).
This cash value may earn interest or grow in value, and these earnings are allowed to grow tax-deferred.decrease in value , depending on the performance of the variable investment options you choose.
Provides the ability to direct cash value to variable investment options
Whole and universal life insurance also have a cash value feature, but they do not allow you as the plicyowner to make decisions about how this cash value is invested. With variable universal life insurance you determine how this cash value is allocated into the variable investment options.
Cash values vary and the owner assumes investment risk along with potentially greater returns
This is what makes it variable. VUL is life insurance, with flexible payments, and a cash value feature like other types of cash value insurance. Beyond that, the VUL policyowner has several options for investing this money. This means that you as the policyowner agree to take on more risk in return for the opportunity to potentially achieve higher returns.
Most VUL policies offer a range of variable investment options, from conservative to aggressive, and you can usually mix-and-match the combination that suits your risk tolerance and financial goals.
Subaccounts, Funds or Variable Investment Options
When you purchase a variable universal life insurance policy, the insurer places part of your premiums net of fees and charges within the various available investment options you can select.
The investment options will vary depending on the company and the specific product you have purchased.Companies call the variable investment choices “options,” “subaccounts,” “variable investment options,” “portfolios,” or “funds.” Variable investment options are actually investments in the subaccounts of the separate account that supports the VUL product.
These variable investment options most often invest in mutual fund portfolios that have been created and are managed to be available through variable insurance products. However, these variable investment options are not mutual funds and are available only within variable universal life insurance and variable annuity products.
Variable investment options are grouped into categories based on lowe r and higher risks and possible returns. An important benefit of a VUL policy is that in most cases you can move money among variable investment options as your needs and investment objectives change. You can often do this without additional transaction charges from the company (usually up to a limited number of times in a year).
In addition, the IRS doesn’t count your move from one variable investment option to another within your VUL policy as creating income for you –and no income tax becomes due as long as no money is actually withdrawn from the policy. (See also “What About Tax Treatment of a VUL?”) Variable investment option returns may be, on average and over time, higher than for other types of insurance that have a minimum guaranteed rate of return. In return for the possibility of achieving these better returns, you take on the risk that the value of your VUL policy’s variable investment options may also go down.
How Do I Know If Variable Universal Life Insurance Is Right For Me?
Used wisely, VUL insurance may have many advantages over other types of products and can be an important part of your overall financial planning. Many companies, have developed a variety of products with a wide range of features and options.
The questions listed below may help you decide which type of life insurance, if any, helps meet your financial needs. You should think about what your goals are for the money you may put into a VUL policy. You need to think about how much risk you’re willing to take with the money.
Ask yourself:
•Do I need life insurance?
•Do I want a variable investment feature that has the potential for higher earnings that
aren’t guaranteed and the possibility that I may risk losing some or all of the principal?
•How much retirement income will I need in addition to what I may get from Social
Security and my pension?
•Will I need that additional income only for myself, or for myself and someone else?
•How long can I leave my money in the VUL policy?
•When may I need income from the VUL policy’s cash value?
•Does the VUL policy let me get money when I need it?
•Do I want a fixed return with a guaranteed interest rate and little or no risk of losing the principal?