Laura Berry is a former State Farm insurance producer and insurance expert.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like

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Reviewed by Daniel Walker
Licensed Car Insurance Agent

UPDATED: Apr 12, 2011

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Variable universal life is a life insurance product that, like whole life, builds up a cash value. Often called VUL, the cash value of this type of policy is invested into a selection of separate investment accounts, called sub-accounts. The sub-accounts mimic mutual funds, and the policy owner can choose into which account he would like to invest the cash value. The policy name has “variable” in it due to values of the sub-accounts that vary since they represent investments in stock or bond markets. “Universal” refers to the policyholder’s ability to make premium payments on a flexible basis. Monthly premiums can be zero in any given month, or paid up to a maximum monthly premium defined by the life insurance code from the IRS. Several benefits and risks come with VUL policies, and consumers may find, as they learn about VUL, that this is the best product to carry out their financial strategy.

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Is VUL the Same as Permanent Life Insurance?

VUL falls under the category of permanent life insurance, since the insured’s beneficiaries will receive the death benefit no matter when the insured dies, as long as insurance costs are covered by the policy’s cash value. A VUL policy carries a degree of risk, but in an optimal scenario, the policy could outperform the rate of return of the insurance company. This rate of return may be higher than that of the fixed rate promised by a whole life policy. Over the years of the policy, the cash value increases the death benefit. This, combined with the higher rate of return earned on the sub-accounts, could return a higher value to beneficiaries or the owner than whole life insurance with the same premium payment amounts. Whole life insurance also has a different payment structure, since the premium payments are typically fixed, and a missed payment will cause the policy to lapse.

Why Choose a Variable Universal Life Insurance Policy?

VUL insurance has an orientation towards investing, and the performance may experience volatility due to the underlying investments. For consumers who understand and are not discouraged by market volatility and the potential loss of their principle, VUL may be a good product fit.

Consumers interested in purchasing VUL insurance should seek flexibility in the design of the policy. This is one of the strengths of VUL insurance, and a customized death benefit, flexible premiums, control over the investment of the premiums, and cash value available through loans or withdrawals are some of the features.

Regarding the choice of investment funds, consumers may select from a wide variety of funds, in different risk categories. Assets may also be transferred tax-free between different funds, and cash can be dollar-cost-averaged into specific funds on a regular schedule.

Since policyholders take on investment risk with a VUL policy, they also receive the benefit of higher-than-expected returns. However, they also bear the cost of lower returns, and a policy could lapse in this scenario, which has caused many life insurance companies to offer a guaranteed death benefit. The guarantee lasts until the policyholder reaches a certain age, as long as the minimum premiums are paid.

Tax Advantages

VUL offers consumers some tax advantages, including the tax-deferred growth of the cash value portion of the policy. Premiums paid on the policy receive FIFO (first in first out) status, which is important if premiums tend to fluctuate over time. The policy also gives its holder the option of taking a loan on the cash value with out paying any tax on the income. This can be significant if the cash value is large, since the loan does not require payback. Any outstanding loans will net against the final death benefit payout of the policy upon death of the insured.

Risks of a Variable Universal Life Policy

VUL insurance policies carry a certain amount of risk that consumers should be aware of before making a purchase decision. The insurance portion of VUL is similar to term insurance – as the policyholder ages, the costs increase. The increases must be monitored against the cash in the policy. The amount of cash needed for a VUL is usually higher than most other types of insurance, and if, due to market fluctuations or other factors, the policy does not have enough cash value to cover costs, the policy may lapse.

The underlying sub-accounts of the VUL will most likely hold stocks and bonds, which passes the investment risk to the policyholder, rather than the insurance company. VULs are a complex product, and because of this, they have a risk of improper funding, planning or investing. This type of insurance purchase is best made with the advisement of a knowledgeable, experienced agent representing a high-quality insurance company.

How Variable Universal Life Insurance can be used

The following are typical features for a VUL policy, as marketed by financial planners or insurance companies. Consumers should be aware that each of the following features can be addressed through other financial means, and consumers will most likely be limited to accomplishing one of the following objectives with a VUL policy, not all.

  • VULs can provide financial protection for families in case of premature death of the policyholder, like all other types of life insurance.
  • Due to the tax-deferred ability, a VUL policy can offer attractive tax advantages to people in higher tax brackets. In order to receive tax advantages, however, the policyholder must put a large amount of money into the policy, so that tax advantages outweigh the cost of the policy. Upper limits exist on funding, but the cash value can be used to fund education for children or other large expenses. Additionally, educational money inside of a VUL is not considered when children apply for federal financial aid.
  • The built-up cash value in a VUL policy can serve as a tax-free source of money in retirement years, although the policy needs to be funded within certain parameters to achieve this.
  • A VUL can be used in some cases to create part of the strategy for an estate-planning situation that avoids or reduces estate taxes, although it involves setting up a life insurance trust.

Critical Opinions

Some critics claim variable universal life policies carry higher expenses than other types of permanent life insurance. The cash surrender value is also subject to more volatility due to the underlying funds and their market fluctuations. Additionally, some VUL policies that have been around for a while do not have a very large choice of sub-accounts. The newer generation of VUL policies has improved, with 50 or more sub-accounts that encompass all major asset classes.

Administrative costs for the policy and other related costs might increase whenever the insurance company chooses to raise them, although a contractual maximum does exist. Variable universal life has more complexity than other types of permanent life insurance, or term insurance.

Some criticisms are directed at the agents who sell VUL, rather than the product itself. Some agents have shown clients a return scenario based on the highest assumed interest rates, generally around 12%, while using current insurance and administrative costs, while neglecting to show any other scenarios, painting an unrealistically optimistic picture of the expected performance.

It pays to be aware and informed when shopping for life insurance. Many insurance companies offer online information about life insurance products, along with calculators and other tools to help consumers figure out the right amount of insurance for their needs.

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