Variable Universal Life Insurance: What You Need to Know

In this article...
  • Find out what variable universal life insurance is, including how it compares to guaranteed universal life insurance and the potential benefits and drawbacks.

Choosing the right life insurance policy for your circumstances is an essential part of providing for your beneficiaries in the event of your death. Understanding which options are available and the implications for your policy's value can help you make the right choice. Below, you can find out what variable universal life insurance is and whether it's a good investment option for you. 

What Is Variable Universal Life Insurance?

Variable universal life insurance combines features from typical variable life and universal life policies. It's a type of whole life insurance policy that pays a death benefit whenever you die, provided you keep up on your premium payments, which may be an advantage if you expect to need coverage for your entire life.

Policies include a death benefit and an investment element that you can earn interest on and is subject to market fluctuations. Your money is invested across two accounts: one with a fixed interest rate and the other tied to market rates where you decide how to invest the funds. 

What Is Included In Variable Universal Life Policies?

Understanding the key features of variable universal life insurance can help you decide if it's the right policy type for you. Most policies share the following features.

Various Investment Options

Like variable policies, universal variable life insurance lets you allocate your premiums across various investment divisions. This means that your policy could increase in value significantly in favorable market conditions, but it could also go down. Beneficiaries can move their money between investment funds and divisions tax-free, letting you adapt your investment strategy if your circumstances or appetite for risk change. 

Adjustable Premiums

Unlike policies with fixed monthly premiums, many variable universal life insurance policies let you adjust your monthly payment if your policy has sufficient value. However, your policy investments will generally need to perform well to increase the cash value sufficiently to decrease or temporarily pause your premium payments. Most policies also let you make lump-sum contributions if you wish to increase its value. 

Adjustable Death Benefit

Most variable universal life insurance policies let you increase or decrease the death benefit according to your circumstances. You may also be able to add the accumulated account value to the death benefit. 

Withdrawals and Loans

Some variable universal life insurance plans let you withdraw some of the cash value or take out a loan against their value. However, bear in mind that this will decrease the cash value and death benefit attached to the policy. You may also be liable to pay tax on any withdrawals, and taking out a loan against your policy will incur interest.

What Are the Benefits of Variable Universal Life Funds?

The primary benefit of variable universal life insurance is flexibility. Many people choose this type of insurance because it lets them select how some of their money is invested on a tax-deferred basis and move their assets between investment funds according to their circumstances. The option to reduce or skip premium payments if the cash value is high enough is also attractive to policyholders whose circumstances might change in the future. 

Another potential advantage of variable universal life insurance is being able to access some of the cash value if you need it. Having some of your funds tied to the markets means that your policy's cash value could increase significantly over time compared to a fixed-rate policy if your investments perform well. 

What Are the Disadvantages of Variable Universal Life Insurance?

One of the potential disadvantages of a variable universal life insurance policy is that the value of your investment is subject to market fluctuations. Therefore, its value could go down and decrease the death benefit, making it a riskier option than a whole life policy with a fixed interest rate and death benefit. 

Another drawback is that many variable universal life insurance plans are more expensive than traditional life insurance. You may also have to pay investment management fees. 

Variable Universal Life Insurance vs. Universal Life Insurance

The key difference between universal life insurance and variable universal life insurance is the flexibility. Guaranteed universal life insurance comes with fixed monthly premiums and provides a fixed death benefit, which means that the cash value is unlikely to increase significantly over the policy's lifetime.

However, this type of policy is low-risk compared to a variable universal life insurance policy, where the cash value and death benefit are tied to investment performance. Unlike variable universal life insurance, you won't have the option to skip or adjust your premium payments. 

Is Variable Universal Life Insurance Right for Me?

Variable universal life insurance could be a good option for you if you want maximum investment flexibility and are comfortable with the risks of tying your policy value to market performance. You also need to be prepared to keep track of your investment performance and reallocate funds if necessary. Generally, this type of policy is most suitable for people who prefer a hands-on approach to investing. 

However, you may be better off with a fixed policy if your priority is a long-term, secured death benefit. Variable universal life insurance might not be right for you if you have a low appetite for risk and want your beneficiaries to receive a guaranteed amount if you pass away. If you're unsure which policy type is best for your circumstances, a financial advisor can help you weigh up your options. 

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