Variable Universal Life Insurance

In a variable life insurance policy, the bulk of your premium is invested in one or more separate investment accounts. You have the choice to select from a wide range of investment options (fixed-income investments, stocks, mutual funds, bonds, money market funds, etc.), and the interest that your accounts earn increases your account's cash value. Your risk tolerance and investment objectives determine the amount of risk you wish to undertake. You can also switch from one investment to another depending on your insurance company's policy.

Normally, insurers have their own professional investment managers who supervise your investments. Therefore, you need only be concerned with the overall asset performance of the investment that you have chosen. In this way, the investment risk can be managed (although it cannot be eliminated).

The Risks Involved
This policy is quite risky because your cash value and death benefits can fluctuate according to the performance of your investment portfolio. Therefore, if your underlying investments perform well, then your death benefit and cash value may increase accordingly; if your investments perform worse than you expected, your death benefit and cash value may decrease.

A variable life insurance policy does offer a guaranteed death benefit, which will not fall below a minimum amount even if the invested assets devalue significantly. For this guaranteed death benefit, you'll need to pay extra premiums. The funding of the death benefit will be done by applying an assumed rate of interest (which is usually around 4%). If the fund performance exceeds or declines beyond this assumed rate of interest, the death benefit will go up or down accordingly.

Generally, a minimum cash value is never guaranteed because poor investment performance can diminish your entire cash value. As a result, you have to bear the brunt of the risk of poor investment performance.

Taxes and Variable Life
As in permanent life policies, the cash value of a variable life insurance policy grows on a tax deferred basis. Many insurers offer premium payments from your accumulated cash value, which means a reduction in premium payment. However, if the investments perform poorly, less money will be accessible from your cash value and you will have to pay more to keep the policy in force.

The Governing Bodies
Because this policy deals with security investment risks, it is considered a securities contract and is governed by the prevailing securities law. It is obligatory to read the prospectus carefully before investing in a variable life insurance policy. Normally, the prospectus discloses the investment objectives, risk, charges and expenses of the investment. Make sure that the agent who is selling you your variable life policy has a valid state license to sell life insurance and an NASD license.

Variable Universal Life (VUL) Insurance
Variable Universal Life (VUL) insurance, as the name suggests, is a policy that combines variable and universal life insurance (i.e. flexible variable life insurance). This is one of the more popular insurance policies because it gives its policyholders the option to invest as well as alter the insurance coverage with ease.

As with universal life insurance, you have the ability to decide the amount and the frequency of premium payment, although within specific limits. You may also make a lump sum payment within certain limits or use your accrued cash value toward premium payments.

Taxes and Variable Universal Life
Because it is a permanent life policy, VUL provides tax-deferred cash value and loan withdrawals - within certain limits - against the cash value. Normally, policy loans are tax free, but you need to confirm this with your insurance advisor because the tax implications may differ from one state to another.

Because you bear the investment risk in these policies, if your investments perform poorly, this may mean that you'll pay higher premiums to sustain the policy.

The Governing Bodies
Like variable insurance, due to the inherent securities risk, VUL policies must be sold with a prospectus and are governed by securities laws. You must carefully read the prospectus before buying a VUL policy.


* does not give investment advice nor do we offer variable products.  The information provided is for educational purposes only.  We strongly recommend that you consult a financial planner and/or CPA before you proceed with any variable product.