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Variable Universal Life Insurance

Last Updated: Oct 2, 2024
Interested in purchasing variable universal life insurance? We break down what you need to know.

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Managing Editor Veronika Jelenik Managing Editor Veronika Jelenik Editor

Veronika Jelenik is an editor with a background in journalism. She previously has had her work published in the New York Daily News and the Hartford Courant, and she has covered many disparate topics. Veronika has a bachelor’s degree in journalism and social and cultural analysis. When not immersed in home services content, Veronika enjoys spending time with her friends and her Chihuahua, Beanie.

Sarah Horvath
Managing Editor Sarah Horvath Managing Editor Sarah Horvath Contributor

Sarah Horvath is a finance writer and researcher based in New York City. She specializes in writing about home warranties, insurance and home financial protection.

Sarah Horvath
Managing Editor Sarah Horvath Managing Editor Sarah Horvath Contributor

Sarah Horvath is a finance writer and researcher based in New York City. She specializes in writing about home warranties, insurance and home financial protection.


Our Research Process

Our editorial team follows a strict methodology for reviewing life insurance companies.

Learn more about MarketWatch Guides
34 Companies Reviewed
60,346 Quotes Collected
Our team collected more than 60,000 sample quotes from life insurance companies using unique user profiles to give readers an accurate view of pricing across competitors. We gather quotes for ages 18 to 75 years old for 62 life insurance providers.
19 Rating Factors
We score life insurance companies based on 19 different factors to provide you with a comprehensive rating.
3,000 Policyholders Surveyed

Selecting the best life insurance policy can provide peace of mind for you and your family. But with so many life insurance options available to consumers, it’s easy to be overwhelmed by the variety of policies available today. This is especially true when exploring whole life insurance options, which are more complex than term life policies.

A variable universal life insurance policy (or VUL policy for short) is a permanent life insurance policy that can be an important part of your long-term financial plans. A VUL not only provides a death benefit but also allows for investments and potential capital gains during the life of the policy.

These policies can be a little more complex because they operate as a hybrid of traditional life insurance and an investment vehicle. They have unique benefits and features to consider before purchasing. In this article, we at the MarketWatch Guides Team will review details of VUL policies to help you understand if one could make sense for your investment objectives and life insurance coverage goals.

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What Is Variable Universal Life Insurance?

Variable life insurance is a hybrid of traditional life insurance coverage with a set death benefit paired with underlying investment options.The investments can increase or decrease the policy’s value over time. The initial money used to secure the policy, periodic premiums paid into the policy, and the investment performance in policy combine to make up the policy’s cash value.

Because variable life policies combine insurance with investing, there are several tax advantages and tax consequences associated with a VUL policy. Depending on the account custodian, the policy may have fees associated with your account maintenance and any policy loans you take. That gives complexity to these policies. It’s important to understand the insurance provider you are working with and the funds you will be investing if you do purchase a VUL policy.

Coverage

While most people are familiar with term life or whole life insurance policy rules, variable universal life policies come with special coverages that can be advantageous to certain investors. Major components of the variable universal life policy structure include:

  • Permanent protection: VUL policies differ from term life insurance (the most common type of coverage) in many ways. The most obvious difference is the length of coverage. VUL policies are structured as permanent insurance with a guaranteed death benefit based on investment choices. While that death benefit’s value can fluctuate because of fees, market performance, and the amount of premiums paid, as long as the policy is in place, beneficiaries are entitled to a benefit when the insured passes away.
  • Cash value loans: Another special component of a variable universal life insurance policy is the ability for a policyholder to take out loans against the cash value of the policy. While you have to pay interest on these loans, they can be tax-free and aren’t usually subject to additional charges. However, loans against a VUL policy can be dangerous: they decrease the cash value. If fees associated with the policy eclipse the cash value, the policy will lapse.
  • Additional riders: Variable universal life insurance companies offer customizable coverage by adding optional coverage through policy riders. These riders ensure your policy meets your needs, but they usually cost more to include. Options like disability coverage and long-term care insurance are examples of how to customize your policy.
  • Tax-deferred cash value growth: The investment component of a VUL policy can increase its value, and you can borrow against the increased value or fund expenses while you’re alive. While the opportunity for growth potential is a major perk, the fact that fees take a portion of the amount contributed make a VUL policy unsuitable for a short-term savings vehicle.

How Variable Universal Life Insurance Works

A few key elements to understand about a variable universal life insurance policy are the policy’s death benefit, subaccounts that you can use for investing, and the premiums associated with the policy. Understanding each component and how they affect the value of the policy will help you make an informed decision as a consumer.

The Policy’s Death Benefit

The variability in a VUL policy comes from the ability to change your death benefit amount throughout the life of the policy. As your life circumstances change, your benefit can go up or down depending on your needs. Significant changes like taking on or paying off a mortgage, sending a child to college, investing in a business, or adding or removing significant debt from your portfolio could all be reasons to adjust your death benefit.

There is no minimum death benefit in a VUL policy. The policy’s premiums become more expensive as the death benefit rises and less expensive as it decreases. Premiums paid toward this death benefit fluctuate accordingly.

Sub Accounts

The money you put into your VUL policy covers your death benefit’s current value, the fees associated with the policy itself, and running your account. The remainder is put toward the cash value of the policy, which gets held in a sub-account or in multiple sub-accounts.

Variable sub-accounts let you invest in one of your policy provider’s approved vehicles, typically a mutual fund. Fixed sub-accounts provide a guaranteed rate of return and work best for the most risk-averse policyholders.

Periodic Premiums

The most unique thing about a variable universal life insurance policy is the ability to change the premium you pay as you see fit. If you pay a greater premium, the policy’s cash value rises. If the cash value becomes large enough, you won’t have to worry about policy lapses because the excess cash will cover fees and premiums.

Conversely, if you pay a minimum amount of premiums, the cash value of the policy can decrease. When that happens, you might have to make large payments to keep the policy active, especially if your investments don’t perform.

Now that you understand some key elements of a VUL policy, it’s easy to see how they can be beneficial for some consumers but too complex for others. Selecting a partner who can help you navigate the correct sub-account investments and advise on premium payments is helpful, but for most people to have a successful VUL experience they must manage the account actively.

Cost and Cash Value of VUL

The initial cost of a variable universal life insurance policy pays for the death benefit amount and also funds the cash value. That cash can go into sub-accounts and get invested from there. Because the policy is customizable, that initial investment can change based on the amount of death benefit you’re seeking and how much you would like to distribute into the savings and investment portion of the policy.

From there, you’ll have the option to pay a flexible premium. The premium must cover the fees to maintain the account, but any excess money gets distributed into a savings account. You then have the option to move it into a sub-account to make investments. A larger monthly premium paid means your cash value increases and it also gives you more investing power.

The cash value of the policy will fluctuate daily if you invest, so if you’re considering a VUL policy, you must be comfortable with the risk of loss that accompanies investment. On the other hand, savvy investors can increase their policy’s cash value if their stock selections perform well.

Fees associated with a VUL policy can make it difficult to maintain and can put the policy at risk of lapse, especially if your investments struggle. Surrender charges are due for early withdrawals, sales fees due to the insurer, loan interest, mortality, and expense risk fees are just a few of the different charges associated with the normal actions of the account.

VUL policyholders should not be passive. If your account’s cash value decreases too much and there is not enough value to cover the account’s fees, then you’ll be in danger of lapse and could lose your investment and your death benefit. It’s possible that you’ll need to afford higher monthly premiums to keep the policy active.


Differences Between Variable Life and VUL Insurance

With similar names and a lot in common, it’s not difficult to confuse variable life and variable universal life insurance policies. Both types of permanent life insurance policies allow for investments to grow cash value. This growth is tax-deferred until withdrawal. Also, neither policy is eligible to earn dividends.

Below are a few different characteristics of each policy and how they might impact someone who buys them.

Variable Life Insurance

  • Guaranteed minimum death benefit: In a variable life insurance policy, you pick the death benefit amount at the start. This amount is guaranteed for the life of the policy. As long as you pay the premiums, your beneficiaries can expect to receive the benefits.
  • Face value can be included: Variable policies allow death benefits to contain a portion of the premiums costs and the cash value. However, including these benefits increase the premiums.
  • Fixed premiums: Because the death benefit of variable life insurance policies is selected from Day 1, your premiums won’t change. This can make a variable life policy a better option for people who prefer a predictable premium.

Variable Universal Life Insurance

  • Ability to change death benefit: As life circumstances change, a VUL policy allows for the death benefit to change, too.
  • Variable premiums: Variable universal life policies often see frequent changes in monthly premium costs. The various fees associated with an account and the death benefit premiums are always due, and if the cash value of the policy doesn’t cover the fees, the policyholder will have to pay more per month in order to keep the policy from lapsing.
  • Face value and premiums not included: In contrast to a variable life policy, VUL does not allow for the inclusion of premiums or face value in the death benefit.


Frequently Asked Questions About VUL Insurance

As is the case with any investment, there’s a risk of loss with a variable universal life insurance policy. If someone is an adept investor, feels comfortable reviewing the investment prospectus, and if they can manage (or hire someone to manage) the sub-account investments, then a VUL policy can be a great way to increase long-term net worth. Because of the nature of the policy and associated fees, it is not a good short-term investment.

While they have many similarities, universal life and variable universal life policies have some important differences. Variable policies have fixed death benefits and premiums, while variable universal policies give the ability to adjust the death benefit and premiums. Also, in a variable policy, the cash value and premiums paid can be included in the death benefit. That’s not true for a VUL policy.

Because monthly premiums can vary and the investment component of the policy includes risk, there’s a chance a policy can lapse if the policyholder pays only small payments and the policy’s underlying investments perform poorly.

The best whole life insurance policies include a set death benefit and a savings account, which can earn dividends. Universal life insurance policies also have a fixed benefit but allow for investment in the stock market and cannot earn dividends.

The minimum amount of insurance under a VUL policy usually varies by the life insurance company, but you can move the death benefit amount up and down over the life of the policy to meet the needs of your situation at the time.


Methodology: Our System for Rating Life Insurance Companies

Our team researches and ranks life insurance companies using an in-depth scoring system that considers the factors most important to consumers like you. Our analysis includes a comprehensive review of each provider we feature based on available coverage, customizability, availability, customer service and company reputation. Here are the factors we take into consideration when rating life insurance providers:

  • Brand trust (40%): Life insurance payouts can exceed $100,000 or more, which makes choosing a reputable and trustworthy insurance provider important. To assess brand trust, we use J.D. Power and Associates customer satisfaction surveys, AM Best credit rating scores and the National Association of Insurance Commissioners (NAIC) complaint index. The higher a company scores in each area, the more points it receives. 
  • Coverage (33%): The more policy options a life insurance company offers, the more opportunities you have to obtain the right coverage for your specific needs. For this reason, we give companies the most points for offering multiple types of life insurance, including various term, permanent and no-exam options. 
  • Availability and ease of use (19%): Since life insurance coverage options can be complex, we consider the ways a customer can reach a company — and how easy communication is. For this category, we research how many communication channels a company offers for general customer support, claims processing and the application process. Companies earn the most points for offering various ways to interact with an agent, both in-person and online. 
  • Riders (8%): Companies offering various life insurance riders or endorsements allow policyholders to better customize their coverage. In this category, we determine how many riders a company offers and award the most points to providers with more than 10 options. 

We use our rating system to compare and contrast each company against key factors to help us determine the best life insurance companies in the industry. To learn more, read our full life insurance methodology for reviewing and scoring providers.

AM Best Disclaimer


If you have feedback or questions about this article, please email the MarketWatch Guides team at editors@marketwatchguides.com.

Meet the Team

Veronika Jelenik is an editor with a background in journalism. She previously has had her work published in the New York Daily News and the Hartford Courant, and she has covered many disparate topics. Veronika has a bachelor’s degree in journalism and social and cultural analysis. When not immersed in home services content, Veronika enjoys spending time with her friends and her Chihuahua, Beanie.

Learn more about Veronika Jelenik

Sarah Horvath is a finance writer and researcher based in New York City. She specializes in writing about home warranties, insurance and home financial protection.

Learn more about Sarah Horvath
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