While some types of life insurance offer very few features other than a death benefit, other types of coverage are more complex. Variable universal life (VUL) is one type of coverage that is more complicated than others, mostly due to the fact it comes with an investment component and a savings component that helps maximize its value over time.
If you're shopping for life insurance and considering variable universal life insurance, read on to learn how this coverage works and who it's best for.
What Is Variable Universal Life (VUL) Insurance?
Variable universal life (VUL) insurance is a type of permanent life insurance. Along with a death benefit that goes to your heirs when you pass away, this type of policy has a built-in savings component and an investment component.
Unlike term life insurance, which typically comes with fixed premiums that never change throughout the life of the policy, variable universal life comes with flexible premiums that can change if you want them to.
For example, variable universal life customers may decide to skip a payment or stop paying their premiums altogether if the cash value of the policy can cover ongoing costs. This makes variable universal life similar to universal life insurance, which often comes with the same benefit.
How Does Variable Universal Life (VUL) Insurance Work?
Variable universal life (VUL) insurance builds cash value as you pay premiums, and policyholders can use these funds to invest in underlying subaccounts. This gives users the chance to build the cash value of their policies, but it also means individuals can reduce the cash value of their policies when markets underperform. If you lose a significant part of the cash value of your policy, this also means the death benefit of the variable universal life insurance policy can also decrease.
Individuals who choose variable universal life (VUL) typically need to have some investing knowledge or instinct, or at least a willingness to rely on a life insurance professional to guide them on where to invest their policy funds.
Generally speaking, users of variable universal life (VUL) insurance have the option to invest their cash value into stocks, bonds, or both options.
Variable universal life (VUL) insurance customers can also access the cash value of their policies while they are living, whether they want to take out a loan against the funds or make a withdrawal.
Advantages and Disadvantages of Variable Universal Life (VUL) Insurance
This type of life insurance is more complicated than term life insurance for sure, but some would say it's more complicated than other types of permanent coverage, including whole life insurance. This is mainly due to the investment component of variable universal life (VUL), and the risk involved in letting the value of the policy fluctuate based on market conditions.
That said, there are still plenty of advantages to consider with variable universal life (VUL). Here are the main pros and cons to consider:
Pros of Variable Universal Life (VUL) Insurance
- Flexible premiums: You may have the option to reduce your premium payments toward a variable universal life policy over time, or to stop paying premiums altogether. These options can be good for your finances during times you're short on cash, but it's worth noting that you can reduce your policy's cash value or death benefit in the process.
- Builds cash value: Variable universal life (VUL) builds cash value you can borrow against. You may also be eligible to take out a withdrawal from the cash value of your policy.
- Potential for growth: Investing your variable universal life (VUL) cash value can also bring significant investment returns over time. This growth can be tax-free until you take a distribution, and it can increase the cash value of your policy and your death benefit.
- Tax-free death benefit for your heirs: Finally, variable universal life (VUL) insurance can help you create a tax-free death benefit for your heirs. This is probably the main reason you want life insurance in the first place.
Cons of Variable Universal Life (VUL) Insurance
- More expensive than term life insurance: The more complicated life insurance is, the higher the premium cost. This is definitely true with variable universal life (VUL), which features premiums that are much higher than some other types of coverage.
- More complicated than it has to be: Some experts believe you shouldn't mix life insurance with investments, and that doing so makes your finances more complex than they need to be. Some variable universal life (VUL) policies are so complicated that life insurance salespeople have trouble explaining their benefits.
- Potential for losses: More risk always equals the potential for reward, although the opposite is also true. While you can build cash value with the underlying investments in your policy, underperforming markets can leave you losing value, too.
Variable Universal Life vs. Term Life Insurance
As you compare different types of life insurance, you should take the time to understand how each type works. For example, there are permanent types of life insurance with a death benefit that is meant to last a lifetime. Variable universal life (VUL) falls into this category, but so does whole life insurance and universal life insurance.
Term life insurance is a totally different animal, mostly because this type of life insurance isn't meant to last a lifetime. Instead, term life insurance lasts for a specific number of years known as a term. Most policies are created to last for anywhere from five to 30 years, although there are always exceptions.
With term life insurance, you'll also notice that policies lack cash value or an investment component. Term life insurance skips over these benefits in order to lower the monthly premiums, which are almost always fixed for the full term of the policy.
Is Variable Universal Life Insurance a Good Value?
While term life insurance is a good insurance product for a large swath of consumers, variable universal life (VUL) can make sense for people who want to maximize the flexibility of their policies, as well as those who seek to use life insurance as one part of a complex financial strategy.
At the end of the day, variable universal life insurance can be a good value for those who know how to use it. If you're a high earner or a retiree with plenty of assets to protect, for example, using a variable universal life (VUL) to secure a death benefit and invest can make a lot of sense.