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Variable Universal Life Insurance

Variable universal life insurance, as defined by the Life and Health Insurance Foundation for Education (LIFE), is permanent life insurance that combines the flexible premiums and flexible death benefits of universal life insurance, with the investment options of variable life insurance.

Unlike universal life insurance, you get to decide how the underlying investments in your insurance policy are invested. You are offered a choice of investment options, including stock and bond funds that can vary in value, or a fixed account that guarantees interest and principal.

Adding to the policy's flexibility, you can amend how your investment allocation or move money from investment option to option, all without creating a taxable event.

Other features that add to the flexibility of variable universal life insurance are:

  • Cash value: Your policy builds value based on your premium payments, less administrative fees, the cost to insure your life, and charges to manage your investment options, plus or minus investment returns. You also have the flexibility of building added cash value by paying additional premiums
  • Loans: You can policy loans against cash value, but only against the value of fixed interest accounts. However. Outstanding loans, as with any life insurance policy, reduce the death benefit
  • Choice of death benefit: You have the choice of two death benefit options. Option A is the face value of the policy. Option B, which usually has higher premiums, is the face value of that policy plus the cash value

The Risk Is On You

A variable universal life insurance policy puts the risk on you, rather than the insurance company, to produce the investment returns necessary to support your policy. Due to the risky nature of the securities in the investment options, securities law, as noted by New York Life, govern these policies. You must receive a prospectus, which you should carefully read.

Also, you may need to meet the suitability rules of the issuing insurance company's compliance department before you are approved for a variable universal life insurance policy.

What May Go Up, May Also Come Down

The upside of a variable policy is that if the investment options you allocate your money in do well, your cash value can build up at rates that may exceed the accumulation of whole or universal life insurance policies. However, if your investments fare poorly, your cash values can decline precipitously. This may necessitate paying additional, unplanned premiums to keep your policy in force.

How Variable Life and Variable Universal Life Insurance Policies Differ

One main difference between variable life and variable universal life insurance policies is the premiums. Variable life insurance policies have fixed premiums. On the other hand, variable universal life allows you to vary your premiums. You can choose to pay more money, up to specified limits, or you can sometimes skip premium payments if the policy's cash value is high enough.

Variable life and variable universal life insurance policies have similar death benefits, which depend upon the return of investment options you choose. However, variable life has a minimum guaranteed death benefit, even if your investment options fall in value.

Another difference is that variable universal life, unlike variable life insurance, allows flexibility in the death benefit amount, even after it is issued. According to Investopedia, you can increase the death benefit, but you may have to show evidence of your good health. You may also reduce the policy's face value, though there maybe be surrender charges if you do so.

Is Variable Universal Life Insurance For You?

Before considering a variable universal life insurance policy, ask yourself a few questions:

  • Are you a knowledgeable investor?
  • Do you know how to diversify your investments among different asset classes?
  • Are you willing to take a risk with the amount of your life insurance policy's death benefit?

Answering no to any of these questions may mean that variable universal life insurance might not be right for you.

Are you more comfortable with a policy that has set premiums and a guaranteed death benefit, one that you can forget about, except when it's time to pay your premiums? If so, then you should think very carefully before buying a variable universal life policy.

However, if you value flexibility, are knowledgeable about investments, are willing to spend time and effort to reallocate premiums and investment options as necessary, the upside potential of the underlying equity investments in a variable universal life policy may make it the right life insurance for your needs.

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