Narrow down life insurance companies by coverage levels, riders offered, medical exam requirements and more to get a quote for a variable universal life insurance policy.
Variable universal life insurance (VUL) is a type of permanent policy that combines the features of a universal policy with the investment options of a variable policy. But while it technically doesn’t expire, there can be financial risks in the form of unaffordable premiums if the investments you choose don’t perform well, which may cause policyholders to lose out.
Variable universal life insurance is hybrid insurance
Variable universal life insurance is a hybrid policy that combines elements of a variable life that has several sub-accounts that you can invest your cash value into and a universal life policy, with premiums that can go up or down.
Variable life insurance is a type of permanent policy, which means it stays active for your entire life, as long as you pay the premiums and offers a death benefit when you die.
The key features of a VUL policy are:
- Choose how to invest. You can choose which accounts to invest your cash value in, but you must choose from options offered through the company.
- A portion of premiums is invested. A portion of your premiums cover the costs of the policy and commissions, i.e., the cost of insurance (COI). The remaining premium money goes into the cash value part of your policy, which is invested.
- Flexible death benefit. You can change the death benefit and tax-deferred cash value growth.
- Flexible premiums. You’ll be able pay more than the cost of insurance (COI) in order to fund your cash value.
- Cash value can pay premiums. Your cash value can be used to pay premiums if/when you’ve built up enough value.
- Flexible premium payment. You’ll have a choice in how to pay premiums, e.g., quarterly, annually, etc. with a lump sum or from your cash value.
- Withdraw or borrow cash value. Policyholders can withdraw or borrow against their built-up cash values, but this may reduce the death benefit and lead to taxes being charged.
- Medical exam required. Variable universal life insurance requires a medical exam to get approved for coverage.
While VUL policies appear to offer more flexibility, sharply rising premiums due to unexpected performance — which may not be offset by the cash value — can cause payments to suddenly become unaffordable. This makes VULs riskier than other types of life insurance, such as whole life or term life.
How variable universal life insurance works
Variable life insurance is a type of permanent policy, which means it will stay in force for as long as the premiums are paid.
Your premiums are first used to cover the costs of the policy and commissions. The remaining premium money goes into the cash value part of your policy.
Unlike a whole life policy, in which the insurance company decides where to invest this cash value, a variable universal life policy lets you decide where to invest the money — with limitations. The company presents you with a number of subaccount options that you can invest in. This is the “variable” part of the VUL policy.
The “universal” aspect allows you to adjust the amount and frequency of your premiums, and change your death benefit. For example, you can choose to pay your premiums quarterly instead of monthly, or use your accumulated cash value to cover your premiums.
The goal of a VUL policy is to grow cash value that can be taken out and used for various life events, such as paying off a mortgage, covering medical expenses or traveling the world.
And if you die prematurely or don’t use all of your cash value, your insurer still pays a death benefit to your beneficiaries.
Variable universal life insurance costs can go up
With VUL, if the assets you invest in perform well and bring in more money than the cost of your insurance, your monthly premiums go down. But, if the assets you invest in don’t perform well, your monthly premiums can go up. When this happens, you either have to pay more in premiums to support your policy’s death benefit, or accept a lower death benefit for the same amount of premiums.
And, while you can use the cash portion of the policy to pay for these increased premiums, there may come a point where cash reserves run out.
If cash reserves run out — either because they’re not sufficiently funded or the sub-accounts aren’t performing as expected — you may be stuck with a big insurance bill every month, forcing you to cancel the policy and lose your investment.
According to attorney David Meyer with law firm Meyer Wilson, who has handled many cases involving these policies over the years, says that “VULs are typically very expensive, offer poor investment choices and don’t work as promised.”
Variable universal life insurance is only for those who can tolerate risk
The goal of a VUL policy is to grow the cash value which can be used to pay premiums, or taken out and used for various needs. But depending on the cash value and performance of the sub-accounts, this may or may not happen.
Variable universal life insurance may only be advisable for certain people. For example, a VUL policy might be a good fit for someone with prior investment experience. It might also suit wealthy individuals with complex financial needs, such as estate planning.
Many people with VULs also invest in the stock market, so the two aren’t exclusive. But a VUL policy is most importantly a life insurance policy that provides a lump sum to your beneficiaries when you die. All the other extras are to help with financial planning.
You need to review the cash value in a VUL every year — so it’s not a good choice for those who don’t understand how premiums impact the cash value or for those who can’t tolerate risk. VUL policyholders lose out when premiums shoot up and the cash value isn’t enough to pay for them.
Pros and cons of variable universal life insurance
- Permanent. You’ll have lifelong coverage no matter what, as long as you pay the premiums.
- Flexible. This policy allows you to adjust your premiums and your death benefit. Flexibility like this can help you keep your policy even as life events change your situation and financial needs.
- Payoff potential. The cash value growth can be an asset down the road. The investment options are also in your hands, giving you greater freedom and responsibility than standard policies.
- Tax benefits. The cash value grows on a tax-deferred basis, while the death benefit is paid out tax-free.
- Complicated. A variable universal life insurance policy is a fairly complex product. You’ll need to understand how to maintain the policy and make sure the cash value is adequate to cover premiums when they go up. If not, you could lose the policy.
- Requires consistent monitoring. You’ll need to keep track of how your cash value subaccounts are performing, especially if you plan to use the cash value to help pay the policy’s premiums. If there isn’t enough cash value to pay the premiums, you might suddenly find your premiums are unaffordable.
- Expensive. VUL policies are much more expensive than a term life insurance policy and are usually more expensive than a standard whole life policy as well. Unless you have a clear plan for the policy, it may not be worth the extra cost.
- Limited investment options. Even though you can choose which sub-accounts to invest the cash value, you’ll have more limited choices than you would if you simply invested the money. This limitation could turn away the wealthy, experienced investors this policy is designed for.
Less risky alternatives to variable universal life insurance
A popular alternative to a variable universal life policy is a standard whole life policy. This policy offers lifelong coverage and builds cash value over time. The premiums are fixed and don’t change over time and your insurance company chooses where to invest your cash value.
If you just want a simple life insurance policy without any cash value, you can look into term life insurance. This policy lasts for a set period of time — usually between 10 and 30 years. The premiums stay the same for the life of the policy, and if you pass away during the term, your beneficiaries will receive a death benefit.
A universal variable life policy is one of the more flexible products on the market. You can adjust your premiums and death benefit, and decide where to invest your cash value. However, it’s more complicated and expensive than other types of insurance and requires you to monitor your cash value to make sure it grows. If not, you could end up losing your policy, even after paying years of premiums.
To find the best policy for your family and needs, compare life insurance companies.
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