Variable universal life insurance

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Life insurance is a valuable tool when you’re planning a legacy for those you leave behind. The problem is, a term life insurance policy is only good for a set period of time. All the premiums you pay towards the coverage are lost if you outlive the policy. Choosing permanent life insurance expands your options by getting rid of the limited term and adding an investment element through the cash value portion of the policy.

There are a few ways you can grow the cash value of your life insurance policy. Whole life insurance provides you with fixed premiums and simple interest but the growth potential is minimal. Of all the types of permanent life insurance, variable universal life insurance coverage provides you with the most flexibility and opportunity to grow cash value. Read on to learn more about variable universal life insurance and how it works.

Variable universal life insurance policies

A variable universal life insurance policy is a type of permanent life insurance. As mentioned above, permanent life insurance 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 three main 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 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 in premiums 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.

Benefits of variable universal life insurance

A variable universal life policy isn’t necessarily for everyone, but it’s 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.

Tax-deferred earnings

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 an outstanding loan, you may be subject to federal taxes on the outstanding amount.

Who should consider a variable universal life policy?

A variable universal life policy is more complex than other types of life insurance. If you’re looking to leave your loved ones with a lump sum to pay off any remaining debts you leave behind or to ensure your kids’ or grandkids’ college is paid for, a simple term life insurance policy may be all you need. If you’d like your life insurance to be part of your overall financial plan, variable universal life insurance may be a better option. VUL is best for:

Those comfortable with investing

VUL is a good option for armchair investors or those who understand mutual funds and how the stock market works. To effectively manage and grow your cash value, you’ll need to be familiar with equities and comfortable with risk.

People looking for additional investment opportunities

If you’ve maxed out your 401(k) and IRA accounts and have a lump sum of cash remaining that you’d like to invest in a tax-deferred fashion, a VUL policy could be a good choice. However, a VUL comes with higher fees, so they should not replace investing in your ordinary retirement accounts first.

Individuals with a higher net worth

If you have a high-value estate which could potentially be subject to estate taxes after you pass, variable universal life insurance could help you plan for the tax bill your loved ones will inherit. As of 2020, estates worth over $11,580,000 for a single filer and double that for a married couple will be subject to federal estate tax.

Frequently asked questions

What’s the difference between term life and variable universal life insurance?

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.

What is permanent life insurance?

Permanent life insurance is not temporary like term life insurance. As long as you continue to pay your premiums, your permanent life insurance policy is in effect.

What is cash value in a life insurance 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.

What’s the difference between whole life insurance and variable universal life insurance?

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 life premiums are flexible and can be adjusted. The cash value can be invested in stocks, bonds or mutual funds for greater growth.

Written by
Cynthia Paez Bowman
Personal Finance Contributor
Cynthia Paez Bowman is a finance and business journalist who has been featured in Bankrate, Business Jet Traveler, MSN,, and She regularly travels to Africa and the Middle East to consult with women’s NGOs about small business development and works with select startups and women-owned businesses to provide growth and visibility.