What Is Variable Universal Life Insurance?

Variable universal life insurance (VUL) is a type of permanent life insurance policy. Permanent life insurance policies are usually designed to stay in force as long as the insured lives, and as long as their insurance premiums are paid in-full and on time. These VUL policies include a cash value account, and if the account has accumulated enough cash value, you may be able to apply those funds towards your insurance premium, withdraw them for other purposes, or even borrow against your cash value.

These VUL insurance policies tend to be flexible in that you are usually able to increase or decrease the death benefit to match your insurance coverage needs as they fluctuate. This can also cause your insurance premium payment to adjust with your coverage policy changes

VUL coverage is split into a permanent life coverage element and sub accounts that provide market exposure, which can produce higher returns but equally carry a risk for your accounts.

You may be able to invest your cash value from the policy in the market using various subaccounts. A subaccount is a segregated account that is nested under a larger account, acting similarly to a mutual fund. This is how your cash value account can grow in returns when the market is improving, or even lose money if the market falls.

This cash value account can allow you to allocate an amount portion of your funds towards your insurance premium, effectively lowering your out-of-pocket premium rates if you opt for this type of policy.

Returns against VUL accounts are not guaranteed, and a low cash balance could influence the insurance premiums payable. However, the returns from the cash value invested into the market offer monthly growth potential based on the financial rates.

VUL policies have several key features and are often a more customizable life coverage product than many alternative insurance structures. These VUL policy features include:

• The ability to withdraw or borrow funds from the cash value account
• Adjustable insurance premiums and death benefits
• The ability to use the cash value to pay towards insurance premiums
• Greater investment variety and policy owner risk

Like other types of permanent life insurance products, VUL policies can allow you to withdraw funds or take out a loan against your cash value‒typically tax-free! The life insurance loan can be used to pay anything including a car, home mortgage, or credit card loans. It’s important to keep in mind that if you don’t repay your policy loan, that loan balance could actually be deducted from the insurance policy death benefit, resulting in a lower benefit for your policy's beneficiaries.

VUL policies also offer greater flexibility than other types of life insurance in that you are usually able to adjust your premiums and death benefit‒within certain limits. If your income varies or is unpredictable, this could be a helpful option to have on hand. However, make sure you are always paying at least the minimum policy premiums in order to keep the life insurance policy in force.

Finally, because you can invest in underlying subaccounts, you may have a wider variety of investment options within your insurance policy. Your investments in a VUL policy are tied to financial markets, so the value of your policy could fluctuate as your investments’ value increases or decreases. So, while you could generate a lot of money and enjoy higher rewards on your underlying investment, you’re also taking on bigger risks and can lose money.

If you have maxed out your life retirement savings, enjoy investing, and are in a position where taking investment losses won’t have a severe impact on your financial situation, a VUL may be the right insurance policy for you. Bear in mind that a VUL can incur policy losses, so you may want to pair this insurance policy with one that offers more of a financial safety net for your beneficiaries.

One of the advantages is that policyholders with a VUL product may be able to control how their cash value is invested, selecting sub accounts that are consistent with their risk appetite and life objectives. Most VUL policies have several account options, and insurance policyholders can select between lower-risk investments with more

Cash values that are linked to high-performance markets can grow more quickly than those of other permanent life insurance products with an account value feature, although there is the caveat that underperforming markets could have the opposite impact.

VULs are generally riskier than other forms of permanent life insurance. The cash value in some VULs is not limited by caps, which means you can yield higher returns. However, it also means there may not be any floors on losses, unlike many whole life or universal life policies. That means your losses of savings can be greater, and may even empty your cash value account.

If your life coverage policy has a low cash value, which falls below the cost of the insurance policy, you may need to pay higher policy premiums or risk sacrificing your coverage. Another factor to consider is that while the greater possible returns are appealing, the product fees may also be higher because there are administrative and account management charges for both the life insurance and invested cash value elements.

Some VUL policies carry a surrender charge, which is an early redemption or exit fee which comes into play if you cancel your variable universal life policy within a certain period. The policy's cancellation charge is usually calculated as a percentage of the cash value at that point in time.

VUL policies usually offer several tax advantages. Like most permanent life insurance policies, your beneficiaries generally will not pay federal income taxes on the death benefit payout. Your cash value account will typically grow tax-deferred‒which just means you usually won’t pay income taxes until you withdraw money from the policy.

Provided your policy is valid and active, you may also be able to access some of the accumulated cash value as an insurance loan, typically without any tax obligation. The drawback is that if you do not repay the loan, including interest, this may reduce the death benefit of your policy.

Should you surrender your VUL policy, the earnings withdrawn remain taxable. It is always worth consulting with a tax adviser if you have concerns about your tax position or the anticipated liabilities linked to withdrawing returns from your life coverage policy's cash value.

Because VULs are similar to mutual fund accounts (in that you have a variety of managed investing options), you have several options for investing your policy cash, including:

• Asset allocation funds: These online funds allocate a specific amount to fixed income and equities depending on your fund’s goal, usually offering income and growth potential to a particular business fund.
• Bonds: A bond is a fixed-income investment representing a loan made by an investor to a borrower, and they are usually business or governmental.
• Equity funds: These are mutual funds that invest in stocks, and may also be called equity securities. These policy accounts can be either passively or actively managed.
• Index funds: This type of investment product is a pooled investment that usually passively replicates the returns of market indexes.
• Fixed-interest accounts: These accounts allow you to secure your life savings for a set amount of time at a set interest rate. This can also be called a ‘fixed-term bond.

The usual structure is to have several separate accounts, each containing varied investment funds or financial instruments, depending on your insurance coverage preferences and life policy's terms. New insurance policyholders should receive a prospectus setting out the available investment products that is in line with federal securities laws, because this type of market participation is treated as a securities contract.

This ensures that you can actively select the investment options that best align with your risk appetite–where a high-risk fund or product also typically has higher potential returns.

Yes, your cash value account may experience losses if your policy's investments are not profitable. This means you could risk losing insurance coverage if you don’t have enough to cover your policy and other fees.

For example, if your insurance premium payment is lower than the amount needed to keep the policy active, your insurance provider will likely draw the difference from the cash value. If the cash value cannot cover the balance, this can impact your insurance coverage or mean you must remit a higher policy premium.

You may be able to avoid this by not pulling funds from your cash value account to pay your insurance premiums when your investments are not growing. If you have concerns regarding your life coverage and cash value account, speak with your insurance agent proactively to review your policy options. An insurance agent can provide information and online resources to help address your concerns.

For more information about variable universal life insurance policies, you can talk to an insurance agent. Evaluating multiple insurance companies can also help you determine what life insurance policy is best for you.