Variable universal life insurance (or VUL) is a form of life insurance that holds a cash value that is to be spent towards several different accounts—distinct from other types of insurance because of the access to a “death benefit” and the option of investment. VUL is primarily known for its “variety” in allowing the user to invest in separate accounts with different values, such as different stock and bond markets, as well as its “universality” for being flexible to all users and allowing different payment schedules, as opposed to most insurance policies that have a strict payment policy. In addition, it is a permanent life insurance, which is where the death benefit comes in: the user’s pension is still paid as long as there is enough cash value to pay all other costs.
As implied above, variable universal life insurance is a complex policy, with many possibilities. Firstly, the number of accounts available and the type of choices to invest in vary in the different VUL policies. Payment schedules are also subject to flexibility of the user and the offering company. The separate accounts with different investments are kept separate from the overall life insuring policy, and are similar to “mutual funds”—an investment program dealing with a variety of professional holdings. A majority of VUL policies label the insured as the manager of their investments rather than the company, and so there is both a larger risk and/or potential return.
There are multiple of advantages in engaging with variable universal life insurance:
- Greater market growth: the user’s value is invested in multiple accounts that are all vulnerable to market growth or decline.
- With VUL, the accounts are flexible enough to be adjusted to fit the trend of growth
- Those with VUL have the advantage of First In, First Out withdrawal
- Tax advantages: VUL’s returns, such as in death benefits or policy loans, are income tax free. Similarly, it is tax deferrable, making it highly attractive to those in the highest tax brackets
- Future planning: the cash value that comes from a VUL is often put towards an education or a retirement fund
In addition however, there are also larger risks that come along with more intensive advantages:
- By engaging in investment with your insurance policy, the responsibility of the investment is on the user, rather than the insurance company
- Although the insurance policy is flexible to be adjusted, there will usually be a cost of change
- Administrative hassle, as VUL involves a lot of understanding and planning
- High costs: the cash needed in the first place to use VUL successfully is much higher than in other insurance options