Variable Universal Life Insurance

Variable universal life insurance is probably the most flexible form of permanent life insurnace on the market today. VUL is permanent insurance that combines the guaranteed lifetime protection, adjustable premium and adjustable coverage of universal life with the growth potential of variable life. The combined features of these policies allows you to customize a policy that fits your needs for the foreseeable future, including when and how much you pay in premiums, the amount of the death benefit, and the investments you are comfortable investing in.

How A VUL Policy Works

A variable universal life insurance policy does not have a fixed amount of premium that must be paid. Instead of a fixed premium amount you only pay enough to cover the expenses and the cost of pure insurance. You can choose to pay, skip, or increase your planned premium amount based on what the policy values are at that time. The insurance company will deduct the expenses related to your policy from each payment that you make. The amount remaining is credited to a cash value account from which the company will deduct its monthly cost for insuring your life. In order to prevent your policy from lapsing, you’ll have to make certain there is enough money in the policy to cover this monthly cost. If you pay in more than is needed to keep the policy in force, the excess remains in the cash value account and is invested in subaccounts, which is separate from the insurance company’s general account.

Subaccounts

Money in a variable insurance policy, including variable universal life, is controlled by the policyowner. The cash value is placed into a separate account from the insurance company’s own investments. You choose from a variety of subaccounts to invest your cash value, including stock funds, bond funds, or money market accounts.

Money in a variable insurance policy, including variable universal life, is controlled by the policyowner. The cash value is placed into a separate account from the insurance company’s own investments. You choose from a variety of subaccounts to invest your cash value, including stock funds, bond funds, or money market accounts.

Adjustable Death Benefit

You may change the amount of your policy's death benefit to adjust to your changing financial situation, subject to the insurance company's guidelines. For instance, the amount of insurance coverage you need may go down if you paid off your mortgage. You should be aware that in order raise your coverage amount you will again have to go through the underwriting process, which would likely include a medical exam. But keep in mind that if you want to raise the amount of your coverage, you must again go through the underwriting process, which may include a medical exam. You may also have the opportunity to choose between a level or enhanced death benefit option, which you may later switch.

A level benefit is one in which your insurance coverage is reduced by the amount of your cash value, therefore reducing your premium because your paying for less coverage. The cash value in your account makes up difference. An enhanced death benefit is one in which your cash value is added to the amount of the death benefit. Your death benefit is enhanced by the amount of your cash value but your premium stays the same because the amount of your insurance coverage remains the same.

Partial Withdrawals and Policy Loans

As with most permanent life insurance, your cash value can be used as collateral to secure loans from your insurance company. You will be charged a fixed or fluctuating interest rate on the outstanding balance of any loan. If you do take out a loan, that portion of your cash value designated as collateral is transferred to the company's fixed interest account. This is because the chance exists that the balance of your variable subaccounts may fall below the amount of your loan due to market fluctuations. The company charges interest on loans at a rate a few percentage points higher than the return you receive in the fixed account. Consequently, loans have a permanent effect on the performance of the subaccount investment return.

If you have an outstanding loan on the books when you die, the death benefit paid to your beneficiary will be reduced by the amount of the loan plus accumulated interest. Another method of accessing the money in your variable universal life policy is through a partial withdrawal or surrender. Since this is not a loan, you're charged no interest for such a withdrawal, but your death benefit will be permanently reduced. Also, a partial withdrawal could trigger a taxable event if the policy is a modified endowment contract or if the withdrawn proceeds exceed the premiums you have paid into the policy.

Sales Charges and Other Fees

With most variable universal life policies, a sales charge is imposed on every premium payment. This charge is generally not sufficient for the insurance company to pay all of the insurance costs incurred in the acquisition of the policy. Over time, the insurance company will recover these costs out of the profits it earns on the policy. However, if you surrender your policy before all of these costs are recovered, a surrender charge is imposed against your cash value. In addition, the fund managers of your variable subaccounts will deduct their fees as they would with any mutual fund.