how variable universal life vul insurance works
variable universal life is a type of permanent life insurance policy it combines a death benefit with a savings component called cash value this coverage can last your entire life so long as you continue paying for the insurance costs a vul lets you adjust how much you pay into the policy each year the same as traditional universal life insurance you must pay enough each year to cover the ongoing insurance costs of your policy the insurer will deduct this amount from your premiums the remainder of your premiums will go toward your policy s cash value 1in a vul you pick how to invest your cash value between a variety of subaccounts your interest and future growth depends on the investment performance if the investments do well your cash value will grow more quickly the growth of the vul insurance policy s cash value is tax deferred 2 policyholders may access their cash value by taking a withdrawal or borrowing funds if your investments do poorly your cash value will not grow as quickly it is possible to lose money with a vul if you face significant losses you may need to make larger premium payments to cover the cost of your life insurance and rebuild your cash value otherwise your policy would lapse and you would lose insurance protection 3unlike whole life insurance the life insurer transfers the investment risk of the vul cash value to you the separate subaccount for a vul is structured like a family of mutual funds each has an array of stock and bond accounts along with a money market option some policies restrict the number of transfers into and out of the funds if a policyholder has exceeded the number of transfers in a year they would need to pay a fee for additional transfers and changes to their investment strategy in addition to the standard administration and mortality fees paid by the policyholder each year the subaccounts deduct management fees that can range from 0 5 to 2 4 because the subaccounts are securities the life insurance representative must be a licensed producer and registered with the financial industry regulatory authority finra to sell a vul 5pros and cons of variable universal life insurancea vul gives you control over how to invest your cash value you can pick the subaccounts that best fit your risk tolerance and investment objectives if your investments do well you can grow your cash value more quickly with a vul versus other types of permanent life insurance since a vul is a form of universal life you can also adjust how much you pay into the policy each year to fit your budget a vul does have risks and drawbacks your cash value return is not guaranteed if your investments perform badly your cash value will not grow as quickly and you could even lose money some years if you don t have enough in cash value to cover the cost of your life insurance you would need to increase your premium payments otherwise you lose your insurance protection lastly vuls can charge high fees because you re paying both for life insurance and investments in addition a vul could include a surrender charge where you owe a penalty if you cancel within 15 years of your purchase depending on the insurance company 4 the surrender charge could be 10 or more of your cash value balance 6suitability and alternativesa vul could make sense if you want permanent life insurance protection have a higher risk tolerance for investing and prefer managing investments yourself it could be worth considering if you ve maxed out your other retirement accounts you could then use a vul for more tax deferred investment growth these products have higher growth potential than other types of life insurance but are more complicated and riskier some other alternatives to consider include variable life variable life also lets you invest in the market through subaccounts however you cannot change the monthly premium in exchange these policies usually promise a minimum death benefit as long as you keep paying even if you lose money with your investments 5universal life universal life lets you adjust the premiums the cash value grows based on market interest rates while the return changes each year there is usually a guaranteed minimum growth rate and no risk of losses whole life whole life is the safest option it charges the same fixed premium and has a guaranteed death benefit and a fixed cash value return in exchange for safety it has the lowest growth potential term life term life is temporary life insurance protection these policies charge a much lower premium than permanent life term life policies do not build cash value you could use the money you save on insurance costs to invest through a brokerage account 5