Variable universal life (VUL) is a type of permanent life insurance policy with a built-in savings component that allows for cash value investment. Like standard universal life insurance, the premium is flexible.
VUL Insurance has investment subaccounts that allow cash value to be invested. The function of the subaccounts is similar to that of a mutual fund. Exposure to market fluctuations can generate significant returns, but it can also result in substantial losses. This insurance got its name from the different results of investing in the constantly fluctuating market. Although VUL insurance offers more flexibility and growth potential than a traditional cash value or whole life insurance policy, policyholders should carefully weigh the risks before purchasing it.
Key points
- Variable universal life (VUL) insurance is a type of permanent life insurance policy that allows you to invest the cash component to produce higher returns.
- VUL insurance policies are built like traditional universal life insurance policies, but allow you to invest the cash value in the market through subaccounts.
- Consequently, the profitability of the cash component is not guaranteed year after year.
- VUL policies are not intended as a stand-alone investment, but as a form of life insurance.
How universal variable life insurance (VUL) works
Like universal life insurance, VUL insurance combines a savings component with a separate death benefit, allowing for greater flexibility in policy management. Premiums are paid in the savings component.
For a VUL policy, the savings component consists of separately managed accounts, called “subaccounts.” Each year the life insurer discounts what is necessary to cover mortality and administrative expenses. The rest stays in separate accounts to earn additional interest.
two components
In a whole life policy, the life insurer assumes the investment risk ensuring minimal growth in cash value. The life insurer transfers the investment risk of the VUL policy to the insured.
The insured must assume the probability that the segregated account may generate negative returns, which will reduce the cash value. Significant and sustained losses compromise cash value. As a result, the policyholder may be required to remit higher premium payments to cover the cost of insurance and rebuild cash value.
Unlike whole life insurance, the life insurer transfers the investment risk of the VUL policy to the policyholder.
subaccounts
The separate subaccount is structured as a family of mutual funds. Each has a variety of stock and bond accounts, along with a money market option. Some policies limit the number of transfers of funds in and out. If a policyholder has exceeded the number of transfers in a year and the account in which the funds are invested is performing poorly, they may have to pay a higher premium to cover the cost of insurance.
Special Considerations
In addition to the normal mortality and the administration expenses that the insured pays each year, in the subaccounts the administration expenses that can oscillate between 0.05% and 2% are discounted. Since the subaccounts are securities, the life insurance representative must be a licensed manufacturer and be registered with the Financial Industry Regulatory Authority (FINRA).
The growth of the cash value of the VUL insurance policy is subject to tax suspension. Policyholders can access their cash value by withdrawing or borrowing funds. However, if the cash value falls below a specified level, additional premium payments must be made to prevent the policy from expiring.
What is VUL in insurance?
VUL stands for Universal Variable Lifetime. It is a variant of standard universal life insurance that allows you to invest part of the accumulated cash value in the market and earn a return.
Is VUL a good investment?
As an insurance product, VUL can increase policy yields during bull markets. However, as a stand-alone investment, VUL will not be able to match the performance of a direct market investment. This is because the fees and cost of the insurance component will reduce the total return.
What can VUL policies invest in?
The exact investment options will vary among insurance companies, but almost all VUL policies allow investments in stocks, bonds, money market paper, ETFs, and mutual funds, as well as a guaranteed fixed rate option.
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