Anyone considering buying a permanent life insurance policy supposedly stumbles upon variable universal life insurance policy. It is also popular by its acronym VUL or vul. It customarily appears latest in the list of the types of whole life insurance policies. The preceding ones are the traditional, variable and universal life insurance policies.
Two Basic Characteristics
Supposedly, you know that any whole life insurance policy invariably bears two peak characteristics: living benefit and death benefit. It provides life-long insurance protection through death proceeds to the insured’s heirs. It also yields cash value in the form of profit that it draws out of investment from your premiums. VUL policy is no exception. What makes it different from other policy types is the way the protection and cash flow work.
VUL Is a Cross-breed
The Variable Aspect
Universal variable whole life insurance is a cross-breed of two kinds of life insurance policies— the variable whole life insurance and the universal whole life insurance. The former is popular for its ‘variable’ aspect. ‘Variable’ in this policy relates to the investment options that you have the freedom to choose. You have a range of sub-account options before you in universal variable life insurance to opt out for investment. Unlike the traditional or ordinary whole life insurance, VUL gives you the investor’s feel.
While high returns reward you with more cash value, losses also make you a loser. And, it obviously has its repercussions on the cash value as well as the mortality benefits.
The Universal Aspect
On the other hand, the universal whole life insurance brings for you freedom with regard to premiums. It permits you to raise or lower your premiums as well as the death benefit the way you find suitable. However, this freedom does not come without its bounds. There is a minimum or maximum range that you are to comply with for the policy to survive.
The universality aspect that lets you re-configure your coverage for the variable universal whole life insurance. You may raise the premiums if you want to. Also, you can lower it to suit to your need when you need to do so. So long as there is enough cash value to meet the official fees of the insurer, you are in the safe zone. In that case you may even choose to stay away from paying premiums.
How Variable Universal Whole Life Insurance Works
For having the flexibilities of both variable and universal whole insurance, you may call universal variable life insurance an insurance of flexibilities. But the way it works does not make it a jump-and-get it type. So, you need to know how variable universal life insurance policy works.
Death Benefit Function
As usual, your premiums fall into two units. One unit builds the death benefit and the other generates the cash value. But the death benefit functions differently in variable universal whole insurance than it does in the traditional whole insurance. For example, the fixed death benefit of traditional whole goes to beneficiaries by way of guarantee. Contrary to this, the variable universal life insurance policy has a different approach to it. In the words of Wikipedia, it comes to you ‘as long as there is sufficient cash value to pay the costs of insurance in the policy’.
However, the death benefit is determined according as you choose it. It may be fixed, fluctuating, a minimum amount or equal to paid premiums. You have only your premiums back when you surrender your policy within 10 years. And of course, it comes minus, if any, the outstanding loans.
Cash Benefit Function
The cash benefit segment in VUL policy differs in a great way from other whole insurance plans. You have an array of investment portfolios before you to choose from. The categories are large, mid and small cap stocks, international equities, hybrid funds, real estates, commodities market, fixed income bonds and government money markets.
As you already know your decision does not come without responsibilities on you. Depending on how the accounts perform, you have prospects of great gain as well as possibilities of huge loss.
Who Run the Investments?
Professional people are there to take care of the investments. They do their jobs independently, but not exclusively of the insurance companies they belong to.
What Are the Possibilities of Loss?
The possibilities of loss are, so to say, scanty and scarce. The sub-accounts that the insurance companies pick usually have well-performing records for long years. Unless there appear catastrophic situations, the possibilities of losses are low. Also, when you have multiple accounts, you have a diminished possibility of incurring losses. For example, while you may have losses in a couple of sub-accounts, you may have medium to high profits from the other portfolios.
More Investment Less Insurance
The singular focus of term life insurance is insurance: its death benefit. You buy it so that your dependents may live well after you. On the other hand, the main focus of an ordinary whole life insurance is both income generation as well as insurance. But VUL is biased more toward investment than insurance. By selecting the investment portfolios, you assume the role of a pseudo-active investor.
Pros of Variable Universal Whole Life Insurance
Prospects of Larger Death Benefit
When you buy a variable universal whole life insurance, you have the promise that the death benefit will convert. No matter when a policyholder dies, the death benefit goes to the named heirs. There is possibility that you receive more by dint of your investment portfolios performing well.
No Endowment Age
Typically, an ordinary whole life insurance policy bears an endowment age of 100th anniversary of the policyholder. At endowment age you receive the fixed amount of money only. Having no endowment age, your cash value comes to you if you do not already take it out.
Prospects of Larger Profit
When it comes to profit prospects, VUL holds more prospects for you. If the sub-accounts that you choose perform well, you can literally have better proceeds.
Access to Cash Value
As you have access to cash value, you can use it for yourself. You can withdraw your proceeds, borrow from it or redirect it to pay up your insurance costs. Also you can take out from 75% to 90% of the cash value deposit.
Flexibility in Insurance and Investment
You have the choice to restructure the death benefit as you find suitable on the basis of your need. Also, you can change the investment sub-accounts from time to time. You can transfer
Variable universal life insurance comes to you as a lapse-free investment. So long as you pay a minimum monthly premium regularly, your policy does not lapse for the first 10 years.
Your VUL policy has multiple tax-advantages for you. You can use it as a tool to avert tax loads on you. If you have a high income, you can avert the tax liabilities by investing in this policy. Besides, your cash value, death benefit and loans do not incur tax.
Cons of VUL
The Risk Is Yours
Often, VUL insurance is an as you sow so shall you reap type of policy. When you choose the investment options, you also choose the outcomes that they involve. State Farm clarifies this in their Variable Universal Life Insurance brochure.
We do not guarantee any minimum Policy Account Value. You could lose some or all of the money you invest and your Policy could lapse without value, unless you pay sufficient additional premiums.
Surrendering your policy can be a literally a regrettable experience. Besides taxes, a whole lot of fees and costs go off your money. Cut-offs coming in per thousand value causes a landslide decrease in your money.
Cash Access Is a Saboteur
Nothing compensates for the loss that you incur when you take out loans or withdraw your cash value. Even if you repay the money taken, your death or policy benefit bears the impacts.
Who Is VUL for?
Unless you have insurability, you cannot buy a universal variable whole life insurance. That is to say, you have to qualify to have the policy. Qualifying not only means surviving paramedic tests for the policy, but also having financial capabilities to purchase it. Typically, you are not eligible to expend more than 10% of your income for this policy. As this policy is tremendously expensive, you have to have a high income to invest.
Also, a reliable knowledge base of the money market and finance is necessary. If you do not understand clearly how the stocks, bonds, equities or commodities funds work, this policy is not for you.
What Life Insurance Mentors Say
Each and every life insurance plan has their buyers. This is the reason we do not discourage any of the policies that exist in the insurance market. We appreciate the gesture of the insurance companies that they warn the buyers of the risks that VUL might have. They also suggest that you consult your financial adviser if you want to purchase this policy. We disagree with them on this issue. We do not think a complete second-hand knowledge of finances can be very positive for you. Unless you already have some basic ideas or experience of investment, you had better find an alternative option. There are many out there: both in insurance and in non-insurance arenas.
Hope you understand whether VUL is the right choice for you.