Variable Universal Life Insurance: A Comprehensive Guide

Variable universal life insurance is a type of permanent life insurance that combines a death benefit with a savings component that can grow tax-deferred.

This flexibility makes it an attractive option for those looking to accumulate wealth over time, in addition to providing a death benefit for their loved ones.

The savings component of a variable universal life insurance policy can be invested in a variety of sub-accounts, such as stocks, bonds, and mutual funds.

These investments can potentially earn higher returns than a traditional savings account, but also come with the risk of losses.

A different take: Life Insurance Policy after Death

Investing in a VUL policy means taking on investment risk, as the cash value inside your policy can grow or decline after you place it in a market-based investment option. This is because investments in stocks and bonds can fluctuate in value.

If your investments perform poorly, you could lose your gains and initial investment, and there's even the added risk that you could lose your life insurance, including the death benefit you initially bought it for. This is a significant risk, especially if you're relying on the policy for financial security.

Check this out: Is Cash Value Life Insurance a Good Investment

The cost of insurance for VULs can also increase as the insured ages, which can further deplete the savings if not monitored properly. This can lead to a situation where the cost of insurance exceeds the cash outlay, depleting the savings over time.

Here are some common investment risks associated with VUL policies:

It's essential to understand these risks and take steps to mitigate them, such as regularly reviewing your investment choices and ensuring you have a solid plan in place to manage your policy's cash value.

Related reading: S Is Covered by a Whole Life Policy

Variable universal life insurance (VUL) policies often come with subaccounts that allow you to invest your cash value in a variety of options.

These subaccounts are structured like a family of mutual funds, with an array of stock and bond accounts, as well as a money market option. Some policies restrict the number of transfers into and out of the funds, so be mindful of those limits to avoid fees.

If this caught your attention, see: The Free Look Provision Fo Rlife Insurance Policies in Fl

You can invest in stocks, bonds, money market securities, ETFs, and mutual funds, as well as a guaranteed fixed-interest option, with most VUL policies offering a range of investment choices.

The exact investment options will vary among insurance companies, but almost all VUL policies allow investments in stocks, bonds, money market securities, ETFs, and mutual funds, as well as a guaranteed fixed-interest option.

You can also choose from asset allocation funds, bonds, equity funds, index funds, and fixed-interest accounts, each with its own level of risk and potential return.

Here are some common investment options available in VUL policies:

Keep in mind that these investment options come with their own set of fees, including management fees that can range from 0.5% to 2%. Be sure to review your policy details carefully to understand the fees associated with your chosen investments.

Variable universal life insurance offers a range of benefits, but it's essential to consider the potential drawbacks before making a decision.

One of the main advantages of VUL is the control it gives you over your cash value investments. You can pick the subaccounts that best fit your risk tolerance and investment objectives.

High growth potential is another benefit of VUL, as your investments can grow more quickly with a VUL versus other types of permanent life insurance.

Flexible premiums are also a pro, allowing you to adjust how much you pay into the policy each year to fit your budget.

However, VULs come with risks and drawbacks. Your cash value return is not guaranteed, and if your investments perform badly, your cash value will not grow as quickly and you could even lose money some years.

High fees are another con, as you're paying both for life insurance and investments. A VUL could also include a surrender charge where you owe a penalty if you cancel within 15 years of your purchase, depending on the insurance company.

Here are some key pros and cons to consider:

Overall, VUL can be a good option for those who have maxed out their life retirement savings, enjoy investing, and are in a position where taking investment losses won't have a severe impact on their financial situation.

Broaden your view: B Owns a Whole Life Policy

If you're considering a VUL policy, you might want to think about variable life insurance, which also lets you invest in the market through subaccounts.

Variable life policies usually promise a minimum death benefit as long as you keep paying, even if you lose money with your investments.

Universal life insurance is another option, which lets you adjust your premiums and has a guaranteed minimum growth rate.

While universal life has its benefits, it's worth noting that it's not as flexible as a VUL policy.

Whole life insurance is the safest option, with a fixed premium and guaranteed death benefit and cash value return.

However, it also has the lowest growth potential, so you'll need to weigh that against your goals.

Term life insurance is a temporary option that charges a lower premium than permanent life insurance, but it doesn't build cash value.

You could use the money you save on term life insurance to invest through a brokerage account.

If this caught your attention, see: What Determines the Cash Value of a Variable Life Policy

Premiums for variable universal life insurance go to three places: the death benefit, the cash value, and the insurer's cost of doing business. The insurer's cost of doing business includes charges to cover mortality costs and contract fees.

The remaining premium payment after insurer costs goes toward building the policy's cash value. The cash value can usually be directed to one of two places: a variable subaccount or a fixed subaccount. Variable subaccounts consist of investment options, while fixed accounts have a set (fixed) interest rate.

Fees and expenses for VUL policies vary by insurer and can include yearly contract fees, ongoing contract charges, administrative and operational expenses, investment management fees, and charges for insurance riders.

A different take: Can You Deduct Life Insurance Premiums as a Business Expense

For those in higher tax brackets, Variable Universal Life (VUL) insurance offers a significant advantage: tax-deferred growth of cash surrender values while the policy is in force.

This means that if you're in a 34% tax bracket, for example, you'll need to earn a 13.64% rate of return in an ordinary taxable account to achieve the same result as a 9% internal rate of return in a VUL policy.

See what others are reading: Whole Life Insurance Loan Rates

To illustrate this, consider the following tax implications of VUL policies:

Keep in mind that taxes can still apply to VUL policies, such as when withdrawing money from the cash value or taking out a policy loan that's not repaid.

Tax-deferred growth of cash surrender values while a policy is in force is a significant benefit of VUL policies. This means you won't pay taxes on the growth of your cash value until you withdraw it.

You can access some of the accumulated cash value as an insurance loan, typically without any tax obligation, provided your policy is valid and active. This can be a useful feature for those in higher tax brackets.

For those in higher tax brackets, such as 25% or more, VUL policies offer a significant advantage. In a 34% tax bracket, for example, you'd need to earn 13.64% in an ordinary taxable account to achieve a 9% rate of return.

Here are the tax advantages of VUL policies:

It's worth noting that adding a large lump sum to your life insurance policy can result in the IRS reclassifying it as a modified endowment contract. These contracts have different tax-time rules than standard life insurance.

In the United States, VULs can only be sold by representatives who have a "producers" life insurance license in the state(s) in which they operate.

The insurance company providing the policy must also be licensed in the state(s) as an "insurer." This dual regulation helps protect consumers, who can look up the track record of offenses of any provider listed by the regulating SRO or provincial securities commission.

In the United States, representatives must be working through a broker/dealer registered with the Financial Industry Regulatory Authority (FINRA) and themselves be registered with FINRA.

You can use FINRA's online database to look up offenses and regulatory actions of any broker or broker/dealer.

In Canada, VULs may only be sold by life insurance-licensed representatives registered with the insurance regulator in their provincial jurisdiction.

Representatives must comply with the life insurance regulations of their respective province.

Worth a look: Become a Life Insurance Broker

Financial strength ratings are a crucial aspect to consider when evaluating an insurance company's stability. Ratings agencies like AM Best, Moody’s, and Standard & Poor’s provide a snapshot of a company's ability to pay claims over the long term.

MassMutual, Minnesota Life, New York Life, and Northwestern Mutual have consistently demonstrated top financial strength, according to data from Veralytic.

Worth a look: Symetra Financial Ratings

Variable universal life insurance policies offer a range of contract features and flexibility that can be tailored to your needs. You can adjust the death benefit up or down, as well as the premiums, within certain limits.

One of the key benefits of VUL policies is the ability to choose the investments inside the policy, which allows you to take on investment risk and potentially receive greater returns. However, if the investment returns are poor, the policy may lapse.

You have flexible premium payments, which allow you to change the amount and frequency of your contributions to the life insurance policy. This can be useful if your income changes.

To maintain a death benefit guarantee, you must pay the minimum premium level specified by the contract. This ensures that the policy remains in force and provides a guaranteed death benefit to your beneficiaries.

Variable universal life policies have a great deal of flexibility in choosing how much premiums to pay for a given death benefit. The minimum premium is primarily affected by the contract features offered by the insurer.

A VUL policy is a type of permanent life insurance policy that combines some of the characteristics of variable life and universal life insurance. This means you can adjust the death benefit up or down, as well as the premiums, within certain limits.

Here are some of the key features of VUL policies:

Variable universal life insurance gives you more flexibility than other types of life insurance. You can adjust the death benefit up or down, as well as the premiums, within certain limits. This can be useful if your income varies, for example.

Variable universal life insurance (VUL) policies can be compared to traditional universal life insurance policies in that they are built similarly, but VUL allows you to invest the cash value in the market via subaccounts.

One key difference is that the return on the cash component is not guaranteed year after year, which means you can even lose money.

If your cash value balance is too low, you may need to pay higher premiums to keep your VUL policy, which can be a significant drawback.

Here's a comparison of VUL and traditional universal life insurance policies:

This highlights the risks and uncertainties associated with VUL policies, which may not be suitable for everyone.

Working with a professional who understands variable universal life insurance (VUL) is crucial when considering this complex product. You'll want to find a financial advisor or experienced life insurance agent who can explain VUL in a way that makes sense to you.

Ask questions, like how the policy will help you meet your insurance and investment goals, and what it will cost, including premiums, fees, and expenses. Don't be afraid to ask for clarification on anything you don't understand.

It's also a good idea to work with a professional who can help you understand the potential worst-case scenarios of the policy, in case your investments tank. According to data from Veralytic, some of the most reliable companies for VUL policy illustrations are Ameritas, New York Life, Northwestern Mutual, and Protective.

To find a qualified professional, look for someone who has experience working with VUL policies and can provide analytical reports from Veralytic to compare the policy you're considering against benchmarks of other VUL policies. This can help you understand where your policy falls in terms of cost competitiveness, reliable policy illustrations, and financial strength of the insurer.

Here's a list of questions to ask a potential financial advisor or insurance broker:

Remember, it's essential to read and understand the prospectus and policy documents, even when working with someone you trust.