Variable Universal Life Insurance

What Is Variable Universal Life Insurance?

Variable universal life insurance is a type of life insurance that provides coverage for a policyholder’s entire life and can act as an investment. This is opposed to term life insurance, for example, which only provides coverage for a set number of years.

Universal life insurance allows for more flexibility than other types of life insurance. As a policyholder, you can change the amount of your premiums and death benefit, though these changes will affect how long your policy lasts. And the cash value of your policy typically grows based on a guaranteed minimum interest rate.

Variable universal life insurance provides even greater flexibility for policyholders. In addition to the premium payment options that universal life insurance offers, variable universal life insurance gives you investment options for your death benefit, so the cash value of your policy could increase or decrease depending on the rate of return of the invested funds.

Life insurance is primarily meant to provide protection and safety for loved ones in the event of the insured’s death. Adding investment allocations to the life insurance product creates a more complex product to understand. Consumers should be careful to understand all the fees and risks when choosing options that will add variability and volatility to their life insurance.

— Stephen Kates, CFP®

How Does Variable Universal Life Insurance Work?

Variable universal life insurance works similarly to universal life insurance. As long as you continue to pay the premiums on the policy, it will never expire. Universal life policies allow you to choose your own premium payment schedule and the amount you pay. How much you pay is part of what determines the cash value of your policy.

If your financial situation changes a few years into your policy, you may even be able to pause your premium payments temporarily. The policy will use the savings you’ve accumulated in the policy account to continue coverage, but if the savings run out, the coverage will lapse.

Variable universal policies differ from universal life policies in the way a policy’s cash value savings are allocated. When you purchase a variable universal life insurance policy, your premiums go toward two separate accounts. One is the fees associated with your policy and the death benefit.

The other goes to a tax-deferred savings account. This account determines the cash value of your policy, and you can choose how to allocate the funds in the account across a range of investment options.

Investment Options

The cash value of a variable universal life insurance policy is tied to the performance of an investment account similar to a mutual fund.

The options for what you can invest your policy’s savings in will vary depending on what the issuer of the policy offers. Typically, you’ll be able to choose from funds with different degrees of risk and reward, such as stocks or bond funds.

You may also have the option to allocate a portion of your policy to a fixed account. A fixed account will pay a guaranteed minimum interest rate. This is a good way to protect some of your premium investment in case the rest of your policy loses some of its cash value due to poor market performance.

Pros and Cons of Variable Universal Life Insurance

Variable universal life insurance offers enhanced flexibility and the potential to grow the cash value of your policy. But with this growth potential comes the risk that your policy will lose value. Before purchasing a life insurance policy of any kind, it’s important to understand the advantages and disadvantages of this type of policy.

The main advantages of variable universal life insurance are the options for customization, flexibility and investment.

Advantages of Variable Universal Life Insurance

Customization

You can choose a flexible premium payment schedule, which means you can customize your coverage based on how much you pay in premiums.

Flexibility

The flexible premium also allows you to adjust your payments if your financial situation changes without the risk of losing coverage.

Tax-Deferred Investment

Putting your premium dollars toward investment funds offers potential for greater growth of your policy’s cash value than a traditional universal life policy that grows at a fixed rate. Additionally, variable universal policies will allow you to move your premium funds between investment divisions. As your needs change over the years, you can reallocate funds to different investment accounts without any tax consequences.

Variable universal life insurance does include some risks, including market volatility and fees.

Disadvantages of Variable Universal Life Insurance

Market Volatility

Because the cash value of the policy is tied to investments, there’s a chance that the policy could lose value if those investments perform poorly.

More Fees

The complex nature of variable universal life insurance means that this type of policy may cost more in fees than a simpler life insurance policy. Fees associated with variable universal life insurance include investment management fees, mortality and expense risk fees, withdrawal fees, surrender charges and policy loan interest.

Variable Universal Life Insurance vs. Variable Life Insurance

Variable universal life insurance shares some similarities with another type of policy called variable life insurance. A variable life insurance policy has a cash value and a death benefit that are based on the performance of an investment portfolio, similar to a variable universal policy.

Unlike variable universal life insurance, variable life insurance does not allow you to adjust your premium payments. You’ll have to pay a fixed premium amount at regular intervals to keep your policy active.

Variable life insurance is best for customers who are willing to take on some risk for the potential of greater returns. If your priority is having flexible payment options and the ability to invest your premiums, a variable universal life insurance policy might be the right choice for you.