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When shopping for a life insurance policy, you may have more options than you realize. While all life insurance policies offer a death benefit, if you are in the market for a life insurance policy that can offer flexible premiums and opportunities for cash value growth, you may be interested in a variable universal policy. However, of the different kinds of life insurance, variable universal policies may be more difficult to understand than more straightforward term and whole life policies. Bankrate is here to help. Our editorial team has decades of combined insurance industry experience, and we are dedicated to demystifying the insurance shopping process to help our readers make informed financial decisions. Below, we have outlined what you should know about variable universal life insurance.
Variable universal life insurance policies
A variable universal life insurance policy is a type of permanent life insurance. Permanent life insurance is twofold: it provides a death benefit you can leave to your beneficiaries after you pass and a cash value account you can use during your lifetime. Permanent life insurance comes in four types:
- Whole life insurance: Fixed premiums, cash value earns interest similar to a savings account
- Universal life insurance: Flexible premiums, cash value earns interest similar to a savings account
- Variable life insurance: Fixed premiums, cash value can be invested in stocks or bonds of the policyholder’s choosing
- Variable universal life insurance (VUL): Flexible premiums, cash value can be invested in stocks, bonds or mutual funds
A variable universal life policy is the most flexible type of permanent life insurance. You can adjust the amount of the death benefit as well as how often (and how much) you’ll pay in premiums once you’ve contributed enough towards the policy. In addition, you can grow the cash value portion of your policy more aggressively by investing it in the stock market by buying equities, bonds or mutual funds.
There’s one caveat — with higher growth potential comes higher risk. As with all investments in the stock market, your cash value can fluctuate. Your investment could make good gains, but losses are also possible. Although, generally with variable universal life insurance, the losses are not as significant as they would be with a variable life insurance policy.
What are variable universal life insurance subaccounts?
Investment subaccounts for a variable universal life insurance policy are where you invest your cash value. With most variable universal policies, these investments typically include stocks, bonds and money markets. However, it is possible that your policy also offers investments into fixed accounts with guaranteed minimum interest. Typically, your subaccounts will be subject to a management fee, which you can expect to hover between .05 percent and 2 percent, depending on your policy.
It can be helpful to think of subaccounts like a mutual fund with one key difference: unlike a mutual fund, subaccounts are tax-deferred. And you may not have to wait to access your cash value; with a variable universal life insurance policy, you may be able to borrow against or withdraw funds from your subaccounts.
Benefits of variable universal life insurance
A variable universal insurance life (VUL) policy isn’t necessarily for everyone, but it may be a good option if you have some investment knowledge and would like to maximize earnings on the cash you’re accruing. Some of the benefits of variable universal life insurance include:
Guaranteed death benefit
Your life insurance policy will have two components: the death benefit and the cash value. The death benefit that will be paid out to your beneficiaries when you pass is separate from the cash value and is guaranteed as long as you continue to pay your premiums.
Flexible premium payments
Most life insurance policies have a set monthly premium. With variable universal life insurance, you can adjust your premium payments according to how much you’d like to invest towards your cash value. You can pay the minimum to keep the death benefit current. You can choose how often you pay your premiums (monthly, quarterly or annually). If the investments you chose cause the cash value to fall, you’ll need to make additional premium payments to prevent the policy from becoming underfunded and lapsing.
More control and greater growth
In other permanent life insurance policies, the amount that goes towards the cash value earns a small amount of interest. You’ll have greater control over your growing balance in a VUL policy. You can invest the cash into a mutual fund or specific stocks for greater growth.
The amount your beneficiaries receive after you die will be exempt from federal income taxes. Any income you earn from the invested cash value is only subject to federal tax at the time you withdraw funds. In addition, you may borrow from your policy’s cash value without having to pay taxes. Keep in mind that if your policy lapses or is terminated with outstanding policy loans, you may be subject to federal taxes on the outstanding amount.
Who might benefit from a variable universal life policy?
There are three types of people who might benefit most from a variable universal life policy:
- Seasoned investors: A variable universal insurance policy is more complex than other life insurance products. Investors who understand how the stock market and mutual funds work and the risk involved with a VUL could benefit from this type of life insurance policy.
- High net worth individuals: Estate planning can be crucial to minimize your heir’s tax bill when you pass. Depending on your state’s estate tax laws at the time of your death, you could pass along a nice nest egg to your heirs via your variable universal life insurance policy, tax-free.
- People who have maxed out retirement: If your 401(k) and IRA accounts have already been maxed out for the year, a variable universal insurance policy may be just the place to put a lump sum of cash. Given the higher fees and cost of insurance associated with a VUL, this option likely doesn’t make sense unless you max out other retirement plan options first.
The intricacies of a variable universal life insurance policy may feel overwhelming to some. If you are looking for a permanent life insurance policy that offers cash value increases and flexible premiums similar to those of a variable universal insurance policy — but is slightly easier to understand — a universal life insurance policy may be worth considering.
Frequently asked questions
Term life insurance is a temporary life insurance solution. It’s less expensive, but is only available for a set term, typically 10, 20 or 30 years. Variable universal life insurance is a form of permanent life insurance that’s good as long as you continue to pay your premiums.
It is possible to cash out any permanent life insurance policy, variable universal policies included. The exact cash surrender value — how much your insurance provider will give you if you cancel your policy — will depend on a handful of details such as how long your policy was active, the amount of money poured into your account and the potential fees or penalties deducted for surrendering the policy.
Permanent life insurance has two parts: the death benefit and the cash value portion. The death benefit is reserved as a payout to your beneficiaries after you pass away. In contrast, you can withdraw and borrow from the cash value portion throughout the life of the policy.
Both are permanent life insurance. Whole life insurance has set premiums for life and the cash value portion earns a small amount of interest. Variable universal insurance policy premiums are flexible and can be adjusted. The cash value could be invested in stocks, bonds or mutual funds for greater growth.