Variable life insurance, also called variable universal life insurance offers lifelong coverage as well as a cash value component. Variable universal life insurance policies offer higher upside potential than other permanent life insurance, such as whole life.
This may sound great, but we urge you to be careful when choosing a variable life policy. These policies often come with higher fees than other permanent life insurance along with a chance for loss, depending on the investment.
What is Variable Universal Life Insurance (VUL)?
Variable life insurance is a type of permanent life insurance that has coverage for the insureds entire life as long as the premiums are paid. All variable life policies have 3 main components.
- Death Benefit
- Cash Value
- Premium
When purchasing a variable life policy, the amount of death protection is the first priority. Once you have the amount that fits your needs, the premium can be calculated. The premium is based on the amount of coverage, your age, and your health status. Variable life insurance allows for an adjustable premium and death benefit.
When you make a premium payment to a variable life insurance policy, a portion of the premium is used to pay the cost of insurance and any fees associated with the contract. The remaining money left goes into the policy’s cash value, which is similar to a brokerage account. Often the cash value is invested in sub-accounts which are structured to resemble mutual funds.
The cash value can be used to increase your death benefit, be withdrawn, or used as a collateral for a loan if it performs well. The cash surrender value is what you would receive if you surrendered your contract also.
Variable Life Policy Cash Value Explained
The cash value component of a variable life policy is what makes these policy’s unique from other permanent life insurance. All variable life policy’s come with a prospectus detailing your options for investing in the cash value. These options are similar to mutual funds in that there is a certain set of securities that the money is invested in. These would include:
- An Index, such as the Dow Jones or S&P 500
- Bonds
- Money Market
- Different stock funds
Management fees, similar to expense ratios for mutual funds, are attached to each investment choice. These fees will vary according to what is being invested and how actively they are invested. These fees can be quite high. Along with these options for investment, variable life insurance policy’s also provide a fixed interest account.
Since there are a variety of options to choose from for investing, variable life policies have a higher upside potential than other permanent life insurance. With that said, their is no downside protection or guaranteed interest with these investment options. This could lead to disaster if the cash value doesn’t perform like it was illustrated.
Costs/Fees Associated with Variable Universal Life Insurance
Variable Universal Life Insurance Death Benefit Explained
A death benefit with a variable life policy usually offers 3 types to choose from:
- Level Death Benefit– This is when the death benefit remains level from the time of purchase till death.
- Death Benefit plus Cash Value- These policies are usually more costly, but your loved ones will receive the death benefit plus what the cash value is at time of death.
- Death Benefit plus Return of Premium- This is when upon death, the face amount of the policy plus premiums are paid to your beneficiaries.
You will always want to check your policy’s terms no matter what death benefit option that you choose. You will always want to make sure the death benefit is guaranteed and, if so, is it the same as the projection that was provided.
The death benefit of a variable policy is essentially a “target” based on an assumption of cash value performance. The illustrations usually provided, project the cash value will be equal to the policy’s face amount when you die. Unfortunately if you cash value doesn’t perform as projected, your death benefit could actual be reduced, depending on the terms of your policy.
Variable Universal Life Insurance Adjustable Premiums
With all universal life policy’s, your premiums are adjustable or flexible. This means when you choose your face amount, you will have a minimum and maximum amount of premium that is required.
You can choose to pay the minimum amount and rely on the cash value to perform to offset the cost of insurance and fees or some people pay the maximum amount and use to fund a LIRP (Life Insurance Retirement Plan). The flexible premiums are why many consumers like these types of life insurance policies.
Also if you have sufficient cash value to cover the cost of insurance and fees you can stop premium payments all together. This is a nice feature for people who don’t want an insurance payment when they retire.
Variable Universal Life Insurance vs. Whole Life Insurance
While both are permanent life insurance products, they are designed totally different. Check the chart out below:
Variable Universal Life Insurance vs. Guaranteed Universal Life Insurance
These policies are designed very similar except for how the cash value interest is accumulated. Also the premiums with variable life policy’s are not guaranteed.
Variable Universal Life Insurance vs. Term Life Insurance
Term life is the most basic form of life insurance and has many differences compared to variable life insurance. See below:
What to Consider Before Purchasing a Variable Life Policy?
If you decide to purchase a variable life policy, it’s critical you understand that you will be required to take a more active role when comes to choosing and maintaining your investment options. It’s a good idea to understand how stocks, bonds, mutual funds, and other investment vehicles function before moving ahead with a variable policy.
You should have a higher risk tolerance and understand that your cash value will fluctuate up and down. With the risk can also come higher returns than your normal permanent life insurance policies. The major factor to consider before purchasing is what your primary goal of the insurance policy is. If you are looking for straight death protection, variable life insurance is probably not for you.
Our Thoughts
While a we do like some of the features of a variable life policy, the truth is that it’s not a good fit for most consumers. The complexity of the policy and it’s cash value investment options can be a nightmare to comprehend. With this said it’s always a good idea to keep an open mind and explore all options that are available. This will ensure you make the right decision for you and your loved ones. If you have any questions or comments please don’t hesitate and give us a call.
