Variable Universal Life Insurance

Overview

Variable universal life insurance is an option that combines aspects of universal and variable life insurance – it has flexible premium payments and adjustable death benefits (like universal life insurance) while also offering a wider range of investment options in stock and bond funds (like variable life insurance).

Variable universal life insurance is best for policyholders who want to have the greatest amount of flexibility and control over their premiums and death benefits, while also being able to pursue higher long-term growth in the cash value of their policy. Variable universal life insurance policyholders should be savvy about investing and knowledgeable about the details of their policy – this is more of a “hands on” product that requires greater involvement and responsibility for the policyholder.

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Variable Universal Life Example

Charles is 40 years old and knows what he wants from a life insurance policy – he had whole life insurance in the past, but grew impatient with the slow rates of cash value growth and the inflexibility of the features. Charles’ children are growing up, and he wants to be able to adjust the value of his policy’s death benefit to better suit the changing financial needs of his family and earn more money for his retirement as he gets older.

Charles’ highest priority in his life insurance policy is finding a higher rate of growth in the cash value. The death benefit is less important; he’s planning to reduce his death benefit once his children reach adulthood. Charles wants a life insurance plan that can deliver better investment returns than the low interest rates of a typical whole life insurance policy.

Charles understands the risks of investing and considers himself to be fairly savvy about the markets – he has a diversified portfolio of stocks and bonds, and wants to manage his life insurance cash value like the rest of his investments.

In many ways, Charles is an ideal candidate to buy variable universal life insurance. He wants higher growth in the cash value of his policy, while also having flexibility to adjust the levels of death benefit and other features of his policy to suit his family’s changing needs.

Charles’ interest in achieving greater growth in the cash value of his policy, while also having more control over features and benefits, means that he should consider buying variable universal life insurance.

Difference Between Variable Universal and Other Types

Variable universal life insurance is similar to universal life and variable life insurance. The biggest difference is that it is a mixture of both of those other types: it combines the flexibility of universal life and the higher growth potential (and investment risk) of variable life.

With universal life insurance, policyholders have a great deal of leeway to adjust the size and timing of their premium payments, but their cash value grows at a fixed interest rate. With variable life insurance, policyholders are assured of having a guaranteed death benefit and a fixed payment schedule, but their cash value goes up and down along with the stock market.

Variable universal life insurance combines the complexities, risks and benefits of both those other types of insurance. It is a good option for policyholders who are knowledgeable about their insurance policies and prepared to assume control over more responsibility for their policies, while also being willing to accept a higher level of investment risk in exchange for larger future gains.

Variable universal life insurance is a “hands on” product. Unlike whole life or term life insurance, it requires policyholders to take an active role in managing their policies and keeping up with the details.  

Who Should Buy Variable Universal Life

Variable universal life is the best choice for people who want the maximum level of control over their policy, while also being able to pursue the highest level of growth in their policy’s cash value.

Variable universal life is for savvy investors who are comfortable with investment risk and who are confident that they know how to manage the details of their insurance policy. A variable universal life policy comes with a greater level of complexity and requires more attention to managing the policy. For example, if the policyholder skips too many payments, the policy might lapse, resulting in a loss of coverage and possible tax consequences.

Alternatives to Variable Universal Life Insurance

The main alternatives to variable universal life are variable life, indexed universal life, and universal life insurance – these are all permanent insurance policies with cash value and a variety of similar features.

Variable life insurance is a high-reward, higher-risk investment – it allows policyholders to invest the cash value of their policy in stocks and bonds, similar to a mutual fund. Although variable life insurance cash values can go up, they can also go down, depending on the performance of the market. The difference is that with variable life, the amount of death benefit and the payment schedule cannot be changed.

Indexed universal life offers higher growth potential than universal life, but with less risk than variable life. Policyholders who want their cash value to grow, but who want to take a more conservative approach than the up-and-down stock market investments of variable life, should consider indexed universal life. With indexed universal life, the cash value’s interest accumulation is guaranteed never to fall below a certain rate, and can even go higher depending on the performance of the stock market.

Universal life insurance has the most conservative financial arrangement, with the cash value invested in low interest money market funds managed by the insurance company. But universal life insurance still allows policyholders a great deal of flexibility to adjust the amount of death benefit, change the size or spacing of premium payments, and add optional riders and features.

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