What is Variable Universal Life Insurance (VUL)?

Understanding different types of life insurance can be challenging. After all, there are may different kinds of life insurance to consider, and each type has different costs, features, risks, and limitations. In this article, we’ll discuss the basics of a variable universal life insurance (VUL) policy, including common features, risks, and considerations. While this article is meant to be informative, you should consult a qualified advisor before making any decisions regarding purchasing or selling any life insurance policy.

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 the insured person’s death — with investment-linked cash value options. This type of life insurance can provide flexibility, but it also carries investment risk, potential loss of cash value, lapse risk, and potentially significant fees. Here’s an overview of 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 life insurance coverage if policy requirements are met and premiums and/or policy value are sufficient to cover policy charges. In return, the policy provides a death benefit to the policy’s beneficiaries upon the insured person’s passing. Death benefits under a life insurance policy are generally income tax-free to beneficiaries, though the tax treatment of any specific policy depends on individual circumstances. For questions about how a VUL policy may affect your tax situation, consult a qualified tax professional.
• Flexible Premium Payments: VUL policies may also allow adjustable premium payments so you can pay more in premiums some years to build cash value and less in others if you find yourself with more financial strain, subject to policy terms. However, reducing or skipping premium payments may increase lapse risk if the policy’s cash value is insufficient to cover policy charges.
• Adjustable Death Benefit: One feature of VUL insurance policies is the ability to adjust the death benefit over time (within certain policy limitations). This flexibility may allow you to modify the death benefit amount based on your changing needs and circumstances. Increases in death benefit may require underwriting or insurer approval, and changes may affect policy costs and other policy values.
• Cash Value Component: Similar to other permanent life insurance policies, VUL features a potential cash value component. The difference is that the policyowner generally chooses how the cash value is allocated among available sub-account options offered by the policy. These sub-accounts may offer exposure to a range of investment options, including stock, bond, and money market portfolios. Sub-accounts are not guaranteed, and their value can increase or decrease based on market performance, fees, and policy charges. The policyowner has the ability, subject to policy terms, to allocate cash value among these sub-accounts based on personal preferences and the options available under the policy. The policyowner bears the investment-performance risk for amounts allocated to variable sub-accounts.

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

VUL and universal life (UL) insurance have many similarities: they both may offer flexible premium payments, the death benefit can sometimes be adjusted, and both UL and VUL may be reviewed for possible eligibility for a life settlement if the policy and policyowner meet buyer, state-law, and transaction requirements. The most significant difference is who bears the investment risk: in a non-variable UL policy, the insurer credits interest according to the policy’s terms; in a VUL policy, the policyowner assumes investment-performance risk by allocating cash value to sub-accounts available under the policy. VUL also typically offers a broader range of investment options as a result.

Unlike non-variable UL, VUL policyowners have the ability to allocate cash value among available sub-accounts, typically tied to different asset classes. They also have the ability to select from the sub-account options offered within the policy.

By contrast, non-variable UL generally credits interest according to the policy’s terms, often subject to a minimum guaranteed rate; indexed UL may credit interest based in part on an external market index, but it is not the same as investing directly in VUL sub-accounts.

It’s important to note that the policyowner takes on more investment-performance risk when they own a VUL insurance policy compared to a UL policy. With non-variable UL, the insurer credits interest according to the policy’s terms and any applicable guarantees; those guarantees depend on the policy and the insurer’s financial strength. However, with VUL, the policyowner assumes the investment risk by allocating cash value to sub-account available under the policy.

Cash value in a VUL policy ay increase or decrease depending on sub-account performance, fees, expenses, and policy charges. Losses are possible. The policyowner may be able to adjust premium payments, death benefits, and allocations within policy limits. Those changes can affect policy charges, cash value, death benefit, and lapse risk. The policyowner bears the investment-performance risk for the variable sub-accounts, while the insurer remains responsible for administering the contract and honoring any contractual guarantees.

Common Consumer Considerations When Reviewing VUL Insurance

VUL is a complex permanent life insurance product with investment-linked cash value. Consumers reviewing VUL generally need to understand the policy’s insurance charges, sub-account options, surrender carges, lapse risk, loan provisions, and how market performance may affect cash value. VUL is not a short-term savings vehicle, and variable sub-account performance is not guaranteed.

• Self-directed policy features: VUL policyowners can direct allocations among available sub-accounts, but they do not control market performance. They can adjust premium payment structures and death benefits within policy limits. However, this type of investment-linked insurance policy comes with significant risk. The policyowner is responsible for monitoring performance and funding the policy enough to keep it in force, including during market downturns. Poor investment performance, policy charges, loans, withdrawals, or reduced premium payments can increase the risk of policy lapse.
• Tax-deferred cash-value access: VUL cash value has the potential to grow on a tax-advantaged basis and can sometimes be accessed through withdrawals or loans, subject to policy terms. However, withdrawals and loans can reduce the death benefit, and there may be tax consequences depending on your individual situation, particularly if the policy lapses or is surrendered while a loan is outstanding. Consumers should consult a qualified tax professional before accessing cash value.
• Policy loan access: A VUL policyowner may access cash value by taking a policy loan. Policy loans accrue interest and reduce available cash value and may reduce the death benefit. If the policy lapses or is surrendered with a loan outstanding, there may be tax consequences. A qualified tax professional can advise on how policy loans may affect your specific situation.

Potential Features and Risks of Variable Universal Life Insurance

Variable universal life insurance offers features, costs, and risks that consumers should understand before making any policy decision. The following is a general educational summary and is not a recommendation or sutability assessment.

Potential Features of VUL

• Investment-linked cash value potential. Because cash value can be allocated to investment sub-accounts, VUL policies may offer the potential for higher returns than some fixed-rate insurance products, along with greater downside risk. The policyowner selects among available sub-accounts and participates in the gains or losses of those options, which may include stock, bond, and money market options. Returns are not guaranteed, and fees and policy charges can reduce cash value.
• Tax-deferred growth. VUL cash value has the potential to grow on a tax-advantaged basis. The tax treatment of withdrawals, loans, and other policy transactions depends on individual circumstances, including how the policy is structured and funded. Consult a qualified tax professional for guidance specific to your situation.
• Flexible premium payments. VUL policies may allow flexible premium payments, subject to policy terms. This flexibility does not eliminate the need to keep the policy sufficiently funded. Reducing or skipping premiums can increase lapse risk if policy values are not enough to cover ongoing charges.
• Estate planning considerations. Some consumers discuss life insurance with estate-planning professionals because a death benefit may provide liquidity for beneficiaries or estates. Estate-tax, beneficiary, ownership, and liquidity results depend on policy structure, ownership, beneficiary designations, estate size, and applicable law. Please note that this article does not provide tax, legal, or estate-planning advice. We recommend speaking with a qualified professional if you are considering a VUL policy.
• Possible life settlement review. Some life insurance policyowners review alternatives to lapsing or surrendering a policy, including whether the policy may qualify for a life settlement. A VUL policy may be eligible for a life settlement only if the policy, insured, and policyowner meet applicable buyer, state-law, and transaction requirements. A life settlement is not guaranteed, and selling a policy may involve fees, tax consequences, loss of coverage, privacy considerations, and other impacts.

Risks and Considerations of VUL

• Policy maintenance. While VUL provides flexibility, it also requires active management and monitoring. Policyowners generally need to stay on top of policy performance, policy charges, and funding levels to understand whether the policy remains in force under current assumptions.
• Market volatility. Because 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. Poor performance can also increase the amount of premium needed to keep the policy in force.
• Cost. VUL policies can involve higher and more complex costs than some other life insurance products. Policy charges, administrative fees, and investment management fees can reduce cash value over time, especially if the policy is not funded or managed appropriately.
• Risk exposure. The policyowner assumes investment-performance risk for amounts allocated to variable sub-accounts. If sub-account performance is poor, cash value may decline, additional premiums may be required, lapse risk may increase, and the death benefit may be affected depending on policy terms.

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

Variable universal life insurance policies may be sellable in a life settlement. Eligibility depends on factors such as the policy’s death benefit, premium costs, the insured’s age and health, state regulations, and whether a buyer considers the transaction economically viable.

A life settlement generally measn selling a life insurance policy to a third party for less than the death benefit but more than the cash surrender value. The buyer becomes the policyowner and/or beneficiary, pays future premiums, and receives the death benefit when the insured person dies. Selling a policy may end or reduce coverage for existing beneficiaries.

Here’s a general overview of how a life settlement works:

1. Qualify. Before a policyowner can receive a potential offer, they will need to find out if their policy qualifies for a life settlement. Eligibility is not guaranteed and may depend on the policy type, death benefit, premiums, the insured’s age and health, applicable state requirements, and buyer interest. Coventry Direct can review your policy and let you know if it may qualify.
2. Document review. If a policy appears eligible for a life settlement, the policyowner will need to sign an authorization allowing the buyer to collect your medical records and life insurance policy information. With that information, the provider can accurately assess your policy and potentially offer to purchase it.
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. Many states provide a rescission or “change your mind” period, but timing and requirements vary by state. Life settlement proceeds may have tax implications, and a sale may affect public benefits, creditor issues, privacy, and beneficiaries. Consumers should consult qualified tax, legal, insurance, and financial professionals before proceeding.

Consumers considering a life settlement may contact Coventry Direct to find out if their policy may qualify.

The Bottom Line

VUL offers substantial flexibility that may create opportunities for investment-linked cash-value growth and premium-payment flexibility. However, the policyowner bears investment risk for the variable sub-accounts and must manage costs, policy charges, and lapse risk carefully.

This article provides a general overview of how VUL insurance works, how it differs from non-variable universal life insurance, and some potential features and risks. It does not determine whether VUL is appropriate for any person and does not recommend buying, selling, replacing, surrendering, borrowing against, or keeping any policy. Consumers should carefully review policy terms, costs, risks, alternatives, and professional guidance before making any decisions about a life insurance or investment product.

Consumers who already own a life insurance policy may review whether the policy could qualify for a life settlement, subject to eligibility requirements, state law, and buyer interest. A life settlement is not guaranteed and may not be appropriate for every policyowner.

Important: Variable Universal Life insurance is a securities product and is subject ot federal securities laws and applicable insurance regulations. It is sold only through appropriately licensed insurance and securities professionals and requires a prospectus. Consumers should read the prospectus carefully before purchasing or making changes to a VUL policy. This article is for general educational purposes only. It does not provide tax, legal, investment, insurance, or financial advice. It does not recommend that any person buy, sell, surrender, replace, borrow against, or keep any life insurance policy or investment product. It also does not analyze or recommend any specific VUL policy, sub-account, insurer, life settlement transaction, or investment strategy. Consumers should consult qualified professionals before making decisions about any life insurance, investment, tax, legal, or financial matter.