What Is Variable Universal Life Insurance?

Key Takeaway

Variable universal life insurance is a type of permanent life insurance policy that has a cash value account tied to financial markets. This cash value account allows insurance policyholders greater flexibility regarding their death benefit and premiums. These life insurance policies can yield high rewards, but also higher risks than other insurance policies that aren’t tied to financial markets.

Variable Universal Life Insurance VUL - Charts & Graphs

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 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 changes.

How a Variable Life Insurance Policy Works

You may be able to invest your cash value 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 a portion of your funds towards your insurance premium, effectively lowering your out-of-pocket premium rates.

What Are the Key Features of Variable Universal Life Insurance?

VUL policies have several key features. 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 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 death benefit, resulting in a lower benefit for your 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 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 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.

VUL Pros & Cons Table

Pros of VUL

Cons of VUL

Flexibility in premium payments and death benefits

Higher risk due to market-based investments

Ability to withdraw or borrow funds from cash value

Possibility of incurring policy losses

Tax-deferred growth of cash value

Fees and charges associated with policy maintenance

Variety of investment options for cash value

Potential for cash value to decrease

Potential for higher returns on investments

Potential for losses on investments

Tax advantages on death benefit and cash value growth

Risk of losing insurance coverage if cash value depletes

Who May Benefit From Variable Universal Life Insurance?

If you have maxed out your 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 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.

How Variable Universal Life Insurance Compares to Other Life Insurance Policies

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 can be greater, and may even empty your cash value account.

Are There Tax Advantages to a Variable Life Insurance?

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 you put in.

What Are the Investing Options for Variable Universal Life Insurance Products?

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

  • Asset allocation funds: These 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 fund.
  • Bonds: A bond is a fixed-income investment representing a loan made by an investor to a borrower, and they are usually corporate or governmental.
  • Equity funds: These are mutual funds that invest in stocks, and may also be called equity securities. These 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 savings for a set amount of time at a set interest rate. This can also be called a ‘fixed-term bond.

Can You Lose Money In a VUL?

Yes, your cash value account may experience losses if your 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.

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 coverage and cash value account, speak with your insurance agent proactively to review your policy options.

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 policy is best for you

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The information above is for educational use only and does not represent insurance, tax or legal advice. It is not a recommendation or solicitation to buy insurance. Please talk to your licensed insurance agent for more information about life insurance and your needs. Please consult with the appropriate professional for tax or legal advice. Guarantees are backed by the claims-paying ability of the issuing insurance company.

Article Author: Meredith Bell
Author Bio: Meredith joined Everly in 2022 and has 20+ years of experience in the life insurance industry. She has held various roles in advertising, marketing, communications, sales and distribution support, and product development. Outside of the office, Meredith lives with her daughter Kennedy and their dog Mavis. Meredith enjoys cooking, camping, gardening, hiking, and bourbon (though not always at the same time). She is a live music enthusiast and an avid reader. Her favorite quote is by Thomas Jefferson: "I cannot live without books." Meredith agrees, but would add cheese, movies, and dogs to that list.

Policies are issued by Everly Life Insurance Company (“Everly Life”), Topeka, KS. Everly Life is not licensed in the state of New York and does not solicit or transact business in New York.

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