Variable Universal Life Insurance (VUL) is a type of life insurance that builds cash value. In a VUL, the cash value can be invested in a wide variety of separate accounts, similar to mutual funds, and the choice of which of the available separate accounts to use is entirely up to the contract owner. The ‘variable’ component in the name refers to this ability to invest in separate accounts whose values vary—they vary because they are invested in stock and/or bond markets.
The ‘universal’ component in the name refers to the flexibility the owner has in making premium payments. The premiums can vary from nothing in a given month up to maximums defined by the Internal Revenue Code for life insurance. The flexibility of variable universal life insurance is in contrast to whole life insurance that has fixed premium payments that typically cannot be missed without lapsing the policy. Variable universal life insurance combines life insurance protection and an investment opportunity in one product. With the ability to invest in professionally managed investment options, you can potentially accumulate cash value while you are providing your family with death benefit protection.
Advantages and Disadvantages Variable Life Insurance
The advantage of variable life insurance is that the death benefit is guaranteed. Other advantages are that the great financial gains can be made if the market changes are positive, you will not be taxed on the earnings invested into your insurance and it is financially flexible account. In variable life insurance, your earned interest can be applied towards the premium amount due, thus lowering the out-of-pocket expenses you must pay. The last advantage is that there are generally a large range of financial opportunities offered by the managing company.
The disadvantage of variable life insurance is that there is no guaranteed cash value. If the fund performs poorly, the cash value and death benefit may decrease. The minimum death benefit is guaranteed, but your cash value is not. If your investments perform poorly over a long time, it’s possible your policy could end up with a cash value smaller than what you would have achieved with a traditional whole-life policy. Your premium costs will have to be paid out-of-pocket to maintain the policy. If the market is in decline, the cash value of investment can be lost. In variable life insurance, you assume the investment risk. Over all, the last disadvantage of variable life insurance is that it is extremely expensive.