Variable Universal Life Insurance (VUL): What It Is & How It Works (2024)

Variable universal life insurance (VUL) provides permanent life insurance coverage. It comes with a cash value account that earns interest and can be used to pay your premiums.

The cash value of VUL earns interest based on the performance of asset funds of your choosing, such as stocks and bonds. The death benefit can also be increased or decreased according to your needs.

If you’ve exhausted your other investing options, VUL is one way to expand your investment portfolio while financially protecting your beneficiaries.

However, a VUL policy is risky because the investing component impacts your premiums and death benefit. VUL also costs significantly more than a term life policy. Because of this, most people are better off keeping their investments separate from their life insurance.

How does variable universal life insurance work?

VUL combines features from universal life and variable life insurance into one policy:

• Adjustable death benefit: Under a universal life insurance policy, you can increase the death benefit (proof that you’re in good health may be required) or decrease it as needed (within limits).

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• Flexible premium pricing: Universal life policies allow you to increase or decrease your out-of-pocket premiums by paying them with your cash value instead.

• Cash value investment options: Variable life insurance allows you to choose the funds that determine your cash value interest gains, like an investment account.

If you need cash, you can borrow against the cash value (including interest) or withdraw all or part of the principal amount. However, if you don’t repay the amount you’ve taken out, it will reduce the death benefit.

If your cash value investments underperform, you may need to start paying premiums out-of-pocket again, which will decrease the amount you can leave to your beneficiaries.

Depending on your provider, you may have a guaranteed minimum death benefit, but the final amount your beneficiaries will receive when you die depends on your cash value’s performance.

Pros and cons of variable universal life insurance

A variable universal life insurance policy isn’t a good investment for most people, but it can work as part of a financial strategy with the guidance of a licensed professional.

Pros:

• It’s an additional tax-deferred investment account. People who regularly reach the contribution limits on their retirement accounts might consider VUL.

• VUL can provide a tax-free inheritance. If your estate is valued at more than $12.92 million, [1] the death benefit can cover the estate or inheritance tax your beneficiaries have to pay.

• You can pay your premiums with the cash value. VUL has a higher likelihood of interest gains than permanent insurance plans with less investment risk, which would eventually allow you to cover your premium payments.

Cons:

• It’s expensive. Although VUL policies can sometimes be cheaper than whole life insurance, they’re always going to be more expensive than term life insurance.

• The investment risk is high. Unlike other types of permanent insurance, VUL doesn’t usually come with a guaranteed rate of return and some policies don’t guarantee a minimum death benefit. With few guarantees, you could lose a significant amount of money and leave your loved ones without financial support. [2]

• There are a lot of fees involved. You may have to pay a mortality and expense fee, fees to the mutual funds into which your premiums are invested, and insurance-related fees. All of these eat into your cash value.

Alternatives to variable universal life insurance

VUL insurance isn’t right for most people due to its high cost and investment risk. Term life, whole life, and even guaranteed universal life insurance are often better fits. The right policy for you will depend on your specific financial needs and goals.

Term life insurance

Term life insurance is more affordable than VUL and whole life insurance. If your primary concern is providing a financial safety net for your family during your peak earning years, term life insurance is likely your best bet.

Term life insurance provides coverage only as long as you need it, comes with few tax restrictions, and frees up money to invest on your own. You can generally get a higher rate of return from traditional investing than from a cash value account.

Whole life insurance

With whole life insurance, you’ll have permanent coverage. Like VUL, premiums are five to 15 times higher than term life insurance premiums.

Whole life insurance earns interest at a fixed rate set by your insurance company and you can’t use the cash value to pay premiums. However, the cash value feature is less complex and has lower investment risk than VUL.

If you’re already maximizing investment contributions elsewhere, whole life insurance may be a good fit for you.

Guaranteed universal life insurance

Guaranteed universal life insurance (GUL) comes with fixedpremiums, minimalcash value, and a guaranteeddeath benefit. It’s more affordable and less risky than VUL.

Unlike other kinds ofuniversal life insurance, GUL premiums remain the same throughout the life of the policy.

The policy won’t lapse if the cash value isn’t enough to cover the policy expenses, which avoids the risk of poor market performance that other universal life policies face.

If you need a permanent death benefit at a lower cost for estate planning reasons or for lifelong dependents, GUL may work for you.

Unless you have a high net worth and have maximized contributions to your other investment accounts, variable universal life insurance is more complex and expensive than you probably need.

You’ll save more money long-term if you purchase a term life insurance policy and invest your savings in a traditional investment account.

If you’re not sure if VUL or permanent life insurance is a fit for you, speaking with a financial advisor or a Policygenius expert can help.