VUL, extendedly speaking, variable universal life insurance is a popular type of whole life insurance that typically gives permanent protection to your heirs. But mere popularity isn’t what you should choose it for. In fact, you need to give a good consideration to it and make sure you know what you’re doing before buying it.
While most people opt for traditional or ordinary whole life insurance, the percentage of people who choose variable universal isn’t scanty. It’s probably the second most popular on the permanent insurance seekers’ wish-list.
When someone talks to you (or you read yourself) about variable universal whole life insurance, you probably can’t ignore listening to it. The pros loom so large. There’re so many flexibilities allowing you to structure and restructure it the way you want. So you may feel like there’s no looking back and grab it.
And surely all this is right.
But the rightness can be relative and depends much on how well you understand your policy and how prudently you deal with it.
Lets’ get knowledgeable in…
How VUL Works
To have a clear understanding of the way variable universal life insurance works, it’s necessary to draw a comparison between ordinary whole life insurance and variable universal whole life insurance. Though they both are designed to cater to your long-term protection goals, they differ greatly in terms of purpose, function and projection.
An ordinary whole life insurance policy is literally ordinary where there is no reading between the lines. You’ve signed up and kept your premiums up-to-date and you’re secure. In the end (when you die off or when you reach the endowment age), you receive the death benefit without any hassle. So, it’s much like a go-and-don’t-worry type insurance plan. It’s comparable to term insurance that wipes off all your anxieties for a certain period.
This simplistic nature is absent in a variable universal policy. While it boasts of flexibilities (we will learn about this feature later) that no other insurance plan entertains, it’s real complicated because you can’t just let your responsibilities (like you do when you buy an ordinary whole plan) onto your insurer’s shoulder and sleep well.
The Reason Is…
This policy is targeted at making money through investment at your own risk. Of course, there are the very essential ingredients you want— the protection that lasts throughout your lifetime. Plus, like you want it from any permanent insurance policy— there is the cash value thing as well.
Things would be easy for you to get if I give you a clear idea about the name of the policy. The two adjectives that the name of the policy entails – variable and universal stand for two characteristics of the policy. They are where the flexibilities are contained in.
The variable side of the policy empowers you to be a decision-making investor in your policy. As such, the insurer lets you choose a number of money market sub-accounts to get your money invested in from an array. The categories include cap-stocks, equities, real estates, commodities market, fixed income bonds, government money markets. Your liberty to choose from such a variety of portfolios is what makes this policy variable.
On the other hand…
The universal side of the policy stands you at liberty to re-configure your death benefit or adjust your premiums. If you realize you need a bigger coverage, the policy allows you to raise it. Similarly, you are eligible to lower the death benefit. In the same way, you can adjust or refrain from paying premiums if you want to (if there’s cash value to adjust it from).
Besides the two major aspects, the policy caters to the consumer’s need in some other ways for which you will have found no insignificant reasons to question whether VUL is a good investment tool. You can take out loan from the cash value accumulation and your policy is lapse-protected for a ten years’ period. Also, all your money gone into investment and all that comes in through it is tax-advantaged. Also, you’ll have no maturity age like it happens in other types of whole life policies. On top of all, a healthy investment in a healthy market could be a great boon for you.
Let me add another point…
the sub-accounts that the insurers provide you are taken care of by professionals who do their jobs independently (not exclusively of the insurers, of course). If you have worries with regard to money-market turmoils, you’ll be glad to know money-market sub-accounts usually don’t sink. And, even if one or two sub-accounts of yours may perform poorly, one or two others will likely do well to compensate for the loss.
Does VUL sound like best fit for you?
Well, it may. But it should depend on several factors. The first thing you need to focus on is your knowledge in the money market. You have to make sure you are choosing the right portfolios. You also need to have the courage to accept loss the way you are interested to get benefited from your policy. If you are not earning enough to deposit in your saving account alongside your policy, you may be making a wrong decision buying this policy. You see your investment isn’t secure here. Also, it is important to remember larger benefit will come only through larger investment. So, making sure you are able to invest in chunks is important.
It’s also important ...
to understand that this policy’s universal aspect isn’t as much universal. Taking out loans or bringing the cash value out may affect the policy in a negative way. While loan will incur interest, the cash value fallen below a certain level will require you to pay additional payment of premiums for avoiding a lapsed state. These situations eventually hamper the insurance itself, which may ruin your or your heirs’ future.
So, however strong a claim VUL may make to be universal, it's NOT FOR ALL.