What is Variable Universal Life Insurance (VUL)?

Published June 13, 2023

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Deciding what kind of life insurance you need can be tricky. After all, there are different kinds of life insurance to consider for your unique needs and life circumstances. In this guide, you’ll learn what variable universal life insurance (VUL) is, how it works, and why it may (or may not) be a great fit for you. Let’s dive into the world of variable universal life insurance and explore its features!

How Does VUL Insurance Work?

So what is variable universal life insurance? Variable universal life insurance combines the features of traditional life insurance — providing coverage for loved ones in the event of an untimely death — and investment options. This type of life insurance provides the ultimate flexibility — but has the most risk. Here’s how it works:

  • Life Insurance Coverage: Like other permanent life insurance policies (including whole life insurance and universal life insurance), VUL is designed to provide you with life insurance coverage for your entire life, as long as you pay enough premiums to keep the policy in force. It provides a death benefit to your beneficiaries upon your passing. This death benefit is a tax-free payout that protects your loved ones financially after you die.
  • Flexible Premium Payments: This type of permanent policy also allows adjustable premium payments so you can pay more in premiums some years to build equity and less in other years, if you find yourself with more financial strain.
  • Adjustable Death Benefit: One of the unique features of VUL insurance is the ability to adjust the death benefit over time (within certain policy limitations). This flexibility allows you to modify the death benefit amount based on your changing needs and circumstances.
  • Savings Component: Similar to other permanent life insurance policies, VUL insurance also has a cash value component. The difference is that the policyowner has control over where the cash is invested. They can invest in various sub-accounts within the policy. These sub-accounts function similarly to mutual funds and offer a range of investment options such as stocks, bonds, and money market funds. The policyowner has the freedom to allocate its cash value among these sub-accounts based on their risk tolerance and investment objectives.

How Does Variable Universal Life Insurance Differ From Universal Life Insurance?

VUL and universal life (UL) insurance have many similarities: they both offer flexible premium payments, the death benefit can be adjusted, and both UL and VUL are eligible to sell in a life settlement as long as the policyowner qualifies. However, there’s one primary difference between life insurance VUL and UL: VUL offers more investment options.

Unlike UL, VUL policyowners have the ability to invest in a variety of sub-accounts, typically mirroring the performance of different asset classes. They also have the ability to handpick the investment accounts within their policy. Alternatively, UL policies allow policyowners to pick an investment route with a fixed interest rate or one that adjusts with the stock market.

It’s important to note that the policyowner takes on much more risk when they take out a VUL insurance policy compared to a UL policy. Typically, the insurance carrier takes on the risk of investing the policyowner’s cash into accounts that will ensure some kind of fixed return. If the portfolio does not perform well, the insurance carrier is still responsible for providing policyowners with the guaranteed rate of return. However, with VUL, the policyowner assumes the investment risk by investing in sub-accounts of their choosing. The VUL policyowner has the ability to make a much higher return — or not. They’re responsible for all aspects of this very flexible kind of insurance and can pull different levers to adjust premium payments and death benefits and investments to maximize their earnings. The risk and reward falls entirely on their shoulders.

Who Could Benefit from VUL Insurance?

VUL insurance can be incredibly beneficial to those who are savvy investors comfortable with a higher level of risk and those who are interested in using life insurance as a means to protect loved ones while maximizing investment potential. There are a few financial strategies to consider if you want to take out a VUL policy:

  • Self-directed control over policy: VUL policyowners have ultimate control over the success of their sub-account investments. They can adjust premium payment structures and death benefits to maximize their sub-account investments. However, this type of self-managed insurance policy comes with great risk. The policyowner is ultimately responsible for keeping the policy in force, despite any downturns in investments.
  • Tax-deferred retirement savings: Similar to most permanent life insurance policies, VUL includes cash value that can be withdrawn. Oftentimes, folks will invest in VUL and use their cash value and earnings during retirement. Withdrawals reduce the death benefit for beneficiaries.
  • Tax-free policy loan benefits: One way VUL policyowners take advantage of the cash in their policy is by taking a loan. While these loans need to be repaid (or else the death benefit decreases), the loan itself is a tax-free, low-interest way to put their cash to work.

Pros and Cons of Variable Universal Life Insurance

Variable universal life insurance offers unique benefits and considerations that are important to understand before deciding if it’s the right insurance product for you. Consider the following pros and cons of this flexible life insurance product while you decide if it’s a fit for your life circumstances.

The Benefits of VUL

  • Investment potential. Because they’re self-managed, VUL policies have the opportunity for higher investment returns compared to traditional universal life policies or other fixed-rate insurance products. You are at the helm of the ship, investing in sub-accounts and participating in the performance of different asset classes, like stocks, bonds, and money market funds.
  • Tax-deferred growth. VUL policies have tax-deferred growth opportunities on the cash value component. You can accumulate investment gains without paying taxes on them until you withdraw the funds. Policy loans are also typically tax-free (up to the amount of premiums paid), providing potential tax advantages.
  • Flexible premium payments. Having an adaptable premium schedule allows policyowners like you to adjust coverage and investment strategies as financial goals and needs change over time.
  • Estate planning advantages. VUL can be useful for estate planning purposes. The death benefit can provide liquidity to cover estate taxes, allowing your beneficiaries to receive the full value of your assets.
  • Option to sell. Life insurance policies are often lapsed or surrendered for a fraction of the policy’s full value. VUL can be sold for cash in a life settlement as long as the policyowner qualifies.

The Disadvantages of VUL

  • Policy maintenance. While VUL provides the utmost flexibility, it also requires active management and monitoring. You need to stay on top of policy performance and make regular adjustments to ensure it aligns with your investment goals.
  • Market volatility. Since VUL policies are invested in sub-accounts, investment returns can vary and even result in loss. If investments perform poorly, the cash value and death benefit may be negatively affected.
  • Cost. Due to its flexibility, VUL policies can cost more than typical permanent life policies. The policy charges, administrative fees, and investment management fees can cause the policy to lose value over time if managed poorly.
  • Risk exposure. One of the biggest disadvantages of VUL is that the policyowner assumes the investment risk. If the underlying investment performs poorly, it could impact the cash value growth and significantly reduce the death benefit.

Can You Sell Your Variable Universal Life Insurance Policy in a Life Settlement?

Variable universal life insurance policies can absolutely be sold in a life settlement. These kinds of policies require the same qualifications that most other policies require: the death benefit must be $100,000 or higher and the policyowner must have had a change in health since they first took out the policy.

If your variable universal life insurance policy qualifies for a life settlement, the average payout is four times the cash surrender value! Here’s how a life settlement works:

  1. Qualify. Before you can receive a fair value offer for your VUL policy, you need to find out if you qualify for a life settlement. The team at Coventry Direct can help you discover if your policy qualifies.
  2. Document review. If your policy qualifies, you’ll sign an authorization to allow the life settlement provider to collect medical records and life insurance policy information. With that information, the provider can accurately appraise your policy and provide you with an offer.
  3. Offer and acceptance. After your policy’s value is determined, the life settlement provider may make you an offer. Should you choose to accept, the policy ownership will be transferred to the life settlement provider and you’ll receive a lump-sum payment to be used as you like!

If you’re interested in finding out if your VUL policy qualifies for a life settlement, get in touch with Coventry Direct today!

The Bottom Line

As you evaluate whether a VUL policy is right for you, your main takeaway should be this: VUL offers the ultimate flexibility in a life insurance policy. This flexibility can lead to higher investment returns and advantages in premium payment schedules. However, it also transfers the investment risk onto the policyowner.

This comprehensive guide has provided an overview of how VUL insurance works, how it differs from universal life insurance, who can benefit from it, and its advantages and disadvantages. Before choosing VUL insurance, carefully assess your financial goals, risk tolerance, and understanding of the policy’s intricacies to make an informed decision that aligns with your personal needs. If you already own a life insurance policy that you are considering selling, Coventry Direct can evaluate your policy and let you know what it’s worth.

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