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What is variable universal life insurance?

Daniel Walker
Licensed Insurance Agent for 15 Years

UPDATED: Mar 19, 2020

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Variable Universal Life InsuranceVariable universal life insurance is actually an extension of traditional whole life insurance. Variable universal life or VUL insurance provides lifetime financial protection to the beneficiary whenever the policyholder dies.

The first major difference between a variable universal life insurance policy and a whole life insurance policy is that a VUL policy builds cash value over time, as opposed to a fixed payment.

The second major difference is that a VUL has an investment component that can be invested in stocks, bonds, and other investments.

Keep reading to learn all about not only the definition of variable universal life insurance but how a variable universal life insurance policy works in practicality.

Be sure to then enter your zip code above to not only compare variable universal life insurance quotes but also term life insurance quotes for a side by side comparison from many companies. Just enter your zip into the free tool on this page and you can start finding the very best life insurance by comparing free online insurance quotes!

How does variable and universal insurance work?

The cash value of the policy can be used in several ways, and in that respect, a VUL is similar to a mutual fund. The contract owner decides which accounts will be allocated the cash value. This explains why the policy is called a variable one; the contract owner can invest in individual accounts and they can vary.

Some of these accounts will be invested in stocks, bonds, equity funds, and even money market funds. Naturally, all of these accounts vary by nature. A contract owner should appreciate a variable universal policy, since it allows him or her to use a variety of options for wealth accumulation.

The term “universal” is used in this instance because universal always means flexible in the insurance world. Contract owners have a host of options for making premium payments. Some contracts have 0 dollars while some are much higher.

The universal aspect of this contract differs from a traditional whole life insurance policy, which always has fixed premium payments. Whole life insurance policies are inflexible and will default if payment is skipped. VUL policies are convenient to say the least.

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Endowment Age and Other Benefits

With variable universal life insurance there is no endowment age. Instead, the policy states that upon reaching the set age, the beneficiary will receive the face amount as stated in the contract. Thus, neither death nor endowment will stop the cash value from accumulating. The only exception to this rule is that there must enough cash value to pay the costs of coverage.

Does that means there is a catch to the policy? There is some investment risk involved. When the funds you invest do poorly then you have less money to pay for the insurance. That means that according to the performance of these variable accounts, you may have to pay more than average premiums in order to keep the policy going.

Otherwise, you risk decreasing the cash value or death benefit paid to the beneficiary. Contract holders are allowed what is called a “defined level” of depreciation, so they have be sure the policy won’t bottom out. However, he or she will not be able to take out any money from the policy until the benefit is paid.

Because of this limited risk, the policy is considered a type of securities contract. Life insurance companies must answer to federal law and provide what is called a “prospectus”, a legal form that describes the securities that are being offered. Policyholders are not taxed on earnings. You also have the option of applying all of your interest towards the premium payment. This move would substantially reduce the price of full premiums.

Why You Might Find VUL Coverage Appealing

What if your investments perform well? If your accounts outperform your policy then you can get a higher rate-of-return that could last for the rest of your policy, or up to the end of your life. The options of variable universal life insurance make it potentially much more valuable than a whole life policy with the same amount of premiums.

What are some of the reasons why you might want a variable life insurance policy? First, it is a legitimate means of financial protection from premature death. Second, this policy provides tax advantages, particularly to insureds that are in a higher income class. Another reason why these policies are so popular is for educational planning. A VUL policy can help to pay for a child’s education, as long as it is started when the child is young. The policy is also beneficial to retirement planning and estate planning.

On the down side, many financial planners state that you will fare better by taking those funds and investing them in other places and taking out a term policy. If you are unsure, take your financial planner about your precise goals and risk level.

You have an obligation to help your loved ones after your death. If you are interested in finding a variable life insurance policy for your loved ones, then look online for an insurance company that can provide you with a flexible plan. Get started using a life insurance rate quote tool right now and take advantage of this flexible and potentially lucrative plan.

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