Your financial advisor — or maybe a neighbor who sells insurance — may have pitched you on a variable universal life insurance policy. You have questions, and rightfully so. Variable universal life, also known as VUL, is a complex product that isn’t right for everyone. Here’s a closer look at VUL and the role it could play in your finances. Show
VUL Insurance MeaningVariable universal life (VUL) is a type of permanent life insurance that has a flexible premium, fixed death benefit, and investment options that function like mutual funds. VUL insurance policies provide lifelong coverage, as long as you continue paying premiums. VUL Insurance FeaturesHere are the primary features of variable universal life insurance that make it attractive over other options:
How VUL Insurance Differs From Universal and Variable LifeVariable universal life is easy to confuse with universal life and variable life — because it has a similar name, but also because it blends key features from these other policy types. The table below shows how VUL insurance compares to universal life and variable life, with an additional explanation provided below.
Variable Universal Life (VUL) vs. Universal LifeUniversal life policies do not use the VUL sub-account system for investing. Instead, your universal life investment portion grows according to market rates or a minimum rate that’s defined in the policy. A universal life policy has lower growth potential vs. a VUL, but also a lower risk of loss. Both variable universal life and universal life policies have a flexible premium, which is an advantage over variable life policies. Variable Universal Life (VUL) vs. Variable LifeBoth variable life and variable universal life have sub-account options for investing. What differentiates variable universal life from variable life is how investment performance affects the death benefit. In a VUL, your death benefit remains fixed as long as you pay minimum premiums and you don’t borrow against your cash value. The rise and fall of your sub-accounts will never change your death benefit. That’s not the case with variable life. This is a life policy with a death benefit that can fluctuate according to investment performance. Most variable life policies will have a minimum death benefit, however. If the investment portion of the policy devalues enough, the death benefit can drop down to the minimum, but not below it. Pros of VUL InsuranceVUL shares in the pros and cons of cash-value life insurance described above. But VUL also has its own differentiators relative to other types of cash-value policies, including these four advantages. 1. More control over your investmentsVUL’s sub-account system for investing cash value gives you more control over risk exposure and asset allocation. You’d choose your sub-accounts in the same way you’d choose mutual funds within an investment account. If you want to position your policy investments conservatively, for example, you might rely on fixed-income sub-accounts. If you want the highest potential for capital growth, you might select sub-accounts that invest in small- and mid-cap equities. 2. Potential for higher returnsBecause sub-accounts are financial market funds, you do have the potential to earn more in VUL vs. other forms of cash-value life insurance. 3. Fixed death benefitAs noted, the underlying performance of your VUL investments does not change your death benefit. In a variable life policy, your death benefit would fluctuate with investment performance. 4. Flexibility on premium paymentsYou do have the flexibility to increase or decrease your VUL premium payments. Cons of VUL InsuranceNow, for the disadvantages. Relative to other types of cash-value life insurance, VUL can be risky, expensive and complex. Keep these five disadvantages in mind as you research your insurance options. 1. Higher risk of lossYou can earn more in a VUL, but you can also lose more. Poor performance of your sub-accounts will be reflected in your cash value. If the sub-accounts devalue enough, you may have to put more cash in to keep your policy from lapsing. 2. Higher feesAll cash-value policies have fees built into the premiums and VUL Is no exception. However, a VUL policyholder also absorbs fees that are embedded in the sub-accounts, which range from .5% to 2%. These fees are the sub-account equivalent to a mutual fund’s expense ratio, and they do lower your investment returns. 3. High surrender chargesSurrender charges on VUL policies can be in force for up to 15 years and can be very high in the early years of the policy. Note that you only pay surrender charges if you cancel your policy. 4. Premiums may riseIf your sub-accounts perform badly, your insurer may increase your premiums to ensure your policy is properly funded. 5. ComplexityVUL policies have many moving parts, including sub-accounts that have to be managed over time. Policyowners who misunderstand the nuances of VUL are more likely to experience poor investment performance or see results that don’t match their expectations. Is VUL Insurance Right For You?Because of the fees and complexity, VUL should not be your first or only vehicle for retirement savings. Even so, VUL may have a role to play in your finances. Often, this type of policy is most appropriate for high net worth individuals who’ve maxed out other tax-advantaged accounts, including 401(k)s and IRAs. The takeaway? Before initiating a VUL policy, make sure you understand where it fits within your overall financial plan and tailor your expectations accordingly. Selling Your VUL PolicyIt can take decades to build up a six-figure cash value in your variable universal life policy. In that time, your financial situation and retirement plan could change — to the point that your life insurance no longer makes sense. You may not want to keep paying the premiums, for example, or you might need to raise cash to cover healthcare and other expenses. In that scenario, you can liquidate your variable universal life insurance by way of a life settlement. Selling your policy to a third-party eliminates your insurance premiums and generates a lump sum of cash to you from the buyer. You can then use that cash however you want. You might pay down debt, pad your cash savings, or earmark the funds for medical costs. To learn more about life settlements, contact Harbor Life Settlements today for a free, no-obligation estimate of your policy’s market value. Is variable life insurance the same as universal life insurance?The main difference has to do with premium flexibility: Variable life insurance policies do not offer premium flexibility. Variable universal policies let you raise and lower premiums within a certain range.
What is variable products in life insurance?What Is Variable Life Insurance? A variable life insurance policy is a contract between you and an insurance company. It is intended to meet certain insurance needs, investment goals, and tax planning objectives. It is a policy that pays a specified amount to your family or others (your beneficiaries) upon your death.
Is universal life a variable product?Universal Life Insurance: What's the Difference. Variable and universal life insurance are both permanent life insurance policies that pay a death benefit and accrue a cash value that can be used for investing.
What are the features of a variable life insurance policy?With a variable universal life insurance policy, the policyholder has the flexibility to choose payment arrangements, vary the amount or timing of premium payments, and generally exercise more freedom over how to manage the cash value and premium obligations of the insurance policy.
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