What is Variable Universal Life Insurance?
Variable universal life insurance is a hybrid of variable life insurance, which allows you to tie your cash value growth to the investments of your choosing, and universal life insurance, which offers flexible premiums. It’s a form of permanent life insurance.
Combining variable and universal life insurance
Variable universal coverage takes the defining characteristics of two types of permanent life insurance and blends them. Those key traits are:
Flexible premiums from universal coverage
Universal life insurance policies set a minimum premium for the policy owner. The minimum premium pays for the cost of insurance. As the insured gets older, that cost — and the minimum premium — increases.
The policy owner can choose to pay the minimum premium or more. This gives them flexibility to adjust what they’re paying (down to the minimum premium) as their financial situation changes.
Any money they pay over the minimum goes into the policy’s cash value, a savings component in the policy that can be used to:
- Pay policy premiums
- Serve as collateral for a loan
- Make a cash withdrawal, reducing the death benefit by that amount
- Get that amount as cash if they surrender the policy, minus any surrender fees
Because universal life policies allow the policy owner to use the policy’s cash value to cover all or a portion of their premiums (provided there is money in the cash value account), the cash value can help to offset minimum premium increases through the years.
Investment options from variable coverage
Variable universal life insurance policies offer the investment opportunity of variable life coverage. Essentially, that means that the policy owner gets to invest the policy’s cash value. They choose how that money gets used from a selection of investment vehicles offered by the insurer.
The cash value then gets tied to the performance of the chosen investments. If they perform well, the cash value can grow more quickly than it would with other types of permanent life insurance. But if they underperform, the cash value can stagnate — or even decrease.
In short, with variable universal life insurance, you get flexible premiums and any amount you pay over the minimum goes into a cash value you can invest how you choose.
Other variable universal life features
Some of these policies offer flexible death benefits, meaning you can increase or decrease the amount the policy’s beneficiaries will receive when the insured dies. Increasing the death benefit usually increases the policy’s premiums. The insured may also need to get a medical exam before the insurer will approve the requested increase.
Finally, variable universal policies come with the same high management/administrative fees as variable policies.