Email FacebookTwitterMenu burgerClose thin

How Variable Universal Life (VUL) Insurance Works


Variable universal life insurance is a type of permanent life insurance policy, like whole life insurance. However, variable universal life (VUL) insurance, which typically allows for flexible premiums, allows the policyholder to invest its cash value in subaccounts, similar to mutual funds. The growth in a VUL’s cash value is tax-deferred, like growth in a health savings account or a 401(k). The decision about what funds to invest a VUL’s cash value in belongs to the policy holder, exclusively. Here’s how it works.

What is Variable Universal Life Insurance?

Variable universal life insurance is a permanent life insurance policy that gives policyholders the ability to accumulate cash value through subaccounts. These subaccounts grant policyholders exclusive control over where to allocate their funds. People also find VUL policies attractive because they have flexible premiums and an adjustable death benefit.

How Variable Universal Life Insurance Works

When considering what kind of life insurance policy to take out, you should determine how much you would like your death benefit to be. You can do this by calculating how much your beneficiaries might need to cover expenses for a set period.

Then, when you take out a VUL policy, you can decide how you want to invest your policy’s cash value. You may wish to overfund the cash value to diversify your investments further. Typically, a financial advisor will be able to help determine the best investing strategy for each individual.

The monthly premiums in a variable universal life policy can vary depending on the desires of the policyholder. A VUL policy will have a monthly minimum premium payment. Still, if there is sufficient cash value in the policy to cover the required minimum payments, the policyholder can pay the premiums from the cash value.

When the insured person dies, the policy will pay a death benefit to the beneficiary or beneficiaries of the policy, provided there is still a death benefit.

Pros of Variable Universal Life Insurance

There are many types of life insurance to choose from. Many people choose variable universal life insurance because it offers:

  • Permanent protection. VUL policies have a minimum guaranteed death benefit. The death benefit will not decrease, provided that the policyholder continues to make the minimum premium payments.
  • Quality investments. There is a potential to earn higher-than-average returns compared to other life insurance types based on the myriad options for investing their cash value
  • Controlled risk. VUL policies allow policyholders to control their risk tolerance by diversifying how they invest their policy’s cash value. Additionally, they can change their monthly payments at will.

Cons of Variable Universal Life Insurance

While VUL offers flexibility and other benefits, there are a few things to watch out for. Some disadvantages include:

  • High administrative costs. VUL is a high-commission product for life insurance agents to sell. Therefore, they have high administrative costs that take effect when a policyholder changes their investments within the cash value of a policy.
  • High responsibility. A VUL insurance policy requires that a person monitor their investments and therefore creates a higher investment risk.

Alternative Life Insurance Policies

Insurance agent explains a policy to a potential customerVariable universal life insurance isn’t for everyone. However, if you want a permanent life insurance policy to accumulate a cash value that you can invest at, you might find VUL to be the perfect fit. You may wish to consider VUL if you want the freedom to decide how to invest your cash value and monitor those investments over time.

If the VUL insurance model doesn’t seem to fit your needs, you might want to evaluate other types of life insurance. Of course, it is wise to speak with a financial advisor before making any significant financial decision.

Term Life Insurance

Term life insurance is a low-cost type of life insurance. Unlike VUL insurance, it only lasts for a set term, typically 10 or more years. They have no cash value to invest, but term life insurance typically has a decent death benefit. Therefore, if your goal is to protect your beneficiaries over the next several years at a low cost, term life insurance might be the best option for you.

Whole Life Insurance

Whole life insurance is another form of permanent life insurance to consider if VUL isn’t the best option for you. This type of life insurance can encompass universal and variable life insurances. When referring to a whole life policy, it is often implied that the coverage will last the insured’s entire life, have a cash value and pay set premiums each month.

Whole life is a good option for consistent premium payments and life insurance that will cover them throughout their entire life.

Universal Life Insurance

Universal life insurance or adjustable life insurance lasts a person’s entire life. However, it has more flexibility than whole life insurance. The cash value of a universal life insurance policy earns interest, and policyholders can choose to have the cash value cover the cost of the premium payments if needed. This can allow policyholders to reduce the cost of their premium payments when money is tight or eliminate the out-of-pocket cost altogether.

Universal life insurance might be a good option for someone who does not want to buy VUL insurance but still wants the benefit of having flexible premium payments.

Variable Life Insurance 

Variable life insurance has a cash value policy that acts as a savings account that policyholders can invest in stocks, bonds and mutual funds. This flexibility might help a policy grow more quickly, but it has the risk of decreasing cash value over time.

Variable life insurance might be useful for someone who does not need VUL’s adjustable premiums but wants the ability to invest their cash value as they see fit.

The Takeaway

Mother and child outsideVariable universal life insurance has similar characteristics to variable life insurance and universal life insurance. Policyholders can change their monthly premium payments and make changes to how their cash value is invested, but this flexibility comes at a cost. Before deciding which life insurance option is best for you, it is wise to discuss your needs with a financial advisor. They will advise on what your options are, the costs and how they will impact you long-term.

Insurance Planning Tips

  • Selecting the right type of life insurance can have lasting effects on your overall finances, especially once you retire. If you’re unsure of which policy to go with, a financial advisor may be able to help. SmartAsset’s free matching tool can make finding an advisor easy, as it pairs you with as many as three local advisors depending on your needs. Get started now.
  • Looking for a quick way to see how much insurance you need to buy? SmartAsset’s free insurance tool will give you a good idea of what makes sense in your situation.

Photo credit: ©, ©, ©