Variable Universal Life (VUL) Insurance

A variable universal life insurance (VUL) policy is a riskier type of universal life insurance. VUL insurance policies have both a guaranteed death benefit and a cash investment component. While the cash investment component will not affect the value of your VUL death benefit, it requires careful management. Because the stock market can always take a turn for the worse, variable universal life insurance policyholders will need to keep an eye on their investments.

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Rachael Brennan has been working in the insurance industry since 2006 when she began working as a licensed insurance representative for 21st Century Insurance, during which time she earned her Property and Casualty license in all 50 states. After several years she expanded her insurance expertise, earning her license in Health and AD&D insurance as well. She has worked for small health in...

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Benjamin Carr was a licensed insurance agent in Georgia and has two years' experience in life, health, property and casualty coverage. He has worked with State Farm and other risk management firms. He is also a strategic writer and editor with a background in branding, marketing, and quality assurance. He has been in military newsrooms — literally on the frontline of journalism.

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Reviewed by Benji Carr
Former Licensed Life Insurance Agent

UPDATED: Jul 19, 2021

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Quick Facts

  • Variable universal life insurance (VUL) policies consist of two parts: a cash investment component and a guaranteed death benefit payout
  • The value of a cash investment component can decrease and increase, depending on the market
  • Only pick an affordable variable universal life insurance policy if you are comfortable with a little risk and managing investments

If you are shopping for a variable universal life insurance (VUL) policy, it is vital that you understand what you are getting yourself into with this type of permanent life insurance. Life insurance products are a lifelong commitment and are harder than regular insurance policies to cancel.

Because variable universal life insurance is a riskier choice of policy than regular life insurance policies, read on to make sure that a variable universal life insurance is the right policy for you.

We will cover the important FAQ you need to know about variable universal life insurance rates and more.

If you want to start shopping for variable universal life insurance right away, use our free tool above.

How does variable universal life (VUL) insurance work?

What is variable universal life (VUL) insurance? It is a permanent life insurance policy, meaning it has no expiration period like types of term life insurance. As long as you keep up with your premium payments, this policy will last your entire life.

So how does variable universal life insurance work when it comes to death payouts?

VUL is a combination of variable life insurance and universal life insurance, which means it has a cash investment component (similar to mutual funds), which means that while there is great potential for financial gains, there is also potential for financial losses.

The difference between variable life insurance vs. variable universal life (VUL) insurance is that not all of your money will be tied up in investments.

There are separate accounts, with one reserved for just for your death benefit, which will not be affected by the gains and losses of your cash component. However, you could still suffer losses and have to pay higher premiums if the cash component crashes.

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What are variable universal life insurance withdrawals?

Because the VUL policies have a cash investment component, policyholders can withdraw money or take out a policy loan on the cash value. These withdrawals are usually tax-free unless you withdraw more money than you put into your policy.

According to the Insurance Information Institute (III), in 2018, $350 billion was paid to policyholders who “terminated their policies early or withdrew cash from their policies.”

The catch to these withdrawals is that the value of your policy will go down if large sums are taken out. In addition, not all insurers may allow you to do this or have restrictions on what you can take out. So make sure to read the fine print and ask plenty of questions before signing up for a policy.

What are the pros and cons of a variable universal life policy?

Now that you know how variable universal life insurance works, let’s dive into the problems with variable universal life insurance.

  • Premiums are not fixed. Your cost of insurance may increase over the course of your life because of these flexible premiums, meaning it will be harder to plan a budget for paying for VUL.
  • The cash value amount is not guaranteed. The investment portion of your VUL policy doesn’t have a minimum amount it can tank to.
  • You will have to monitor your investments. This isn’t a policy you can put money into every month and forget about. You will need to monitor your investments and tailor your investment choices based on market fluctuations.

Of course, there are also a number of benefits to VUL policies. Let’s look them over.

  • Guaranteed death benefit. Even if the variable portion becomes a victim of financial market performance and tanks, your beneficiaries will still receive money.
  • Possibility for higher returns. As long as you are okay with a little risk, there is the increased growth potential with variable products that you don’t get with other permanent life insurance policies.
  • You can make cash withdrawals. If your insurer allows it, you can withdraw from the cash value portion of your VUL policy, which means you can take advantage of your investments.

We hope this cleared up the variable universal life insurance pros and cons, as considering these aspects will help you decide if VUL is right for you.

Is variable universal life insurance a good investment?

Because variable universal life insurance has a fixed death benefit payout, it is a better choice of an investment than a variable life insurance policy, which has a much higher investment risk. With this type of policy, you know that you will have life insurance protection even if your investment performance is subpar. 

However, whether VUL is a good investment option or not depends on your own financial needs and experience with investments.

If you know nothing about investments, you probably shouldn’t get a VUL policy. However, if you feel confident as a more sophisticated investor and are willing to take the time to monitor your VUL policy, it could be a good investment opportunity.

As with any investment, there is a little risk involved. But because VUL has a fixed death benefit that is unaffected by your investments, the risk is reduced compared to other forms of life insurance that features investment products.

To decide if VUL is a good investment for you, try talking to a financial advisor, as they can give you better advice tailored to your personal finances and investment objectives.

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Who can benefit from variable universal life insurance?

Anyone can benefit from a variable universal life insurance policy, but it is best for those who are able to handle the ups and downs of investments. They should also want a permanent life insurance policy with a cash value component.

If a person doesn’t want to manage investments and face risk, they will not benefit from a VUL policy and would be better off with a universal life insurance policy or whole life insurance policy.

But if you want to control your investments, have the opportunity to earn cash rewards, and still have the security of a fixed death benefit, you can benefit from a VUL policy.

Can you cancel a variable universal life insurance policy?

If you decide that a VUL policy is not right for you, it is important to carefully weigh your options. VUL policies aren’t as easy to cancel as auto insurance or home insurance policies.

There are generally two options for canceling a life insurance policy. If you choose to cancel, it is generally harder to get a refund on your policy. This means your cash value savings will go to the insurer.

However, if you choose to surrender a policy, a third party takes over paying for your life insurance policy. You will get a buyout price, which can usually be a hefty sum. When you die, the third party will get your death benefit payout.

Make sure to talk to your insurer about these buyout sums and potential fees for canceling. Usually, if you cancel before 10 or 15 years, there will be a significant cancellation penalty fee.

If you are still undecided about if VUL is right for you, we recommend reading variable universal life insurance reviews of companies to find one that is right for you and gain a deeper insight into variable universal life insurance pros and cons at companies.

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