Loading the player...

What is 'Variable Universal Life Insurance (VUL)'

Variable universal life (VUL) is permanent life policy with a built-in savings component. The plan allows for the investment of the cash value. Like standard universal life insurance, the premium is flexible.

BREAKING DOWN 'Variable Universal Life Insurance (VUL)'

Variable universal life insurance has variable, sub-accounts, which allow for the investment of the cash value. The function of the sub-accounts is similar to a mutual fund. Exposure to market fluctuations can generate significant returns but could also result in substantial losses. This insurance gets its name from the varying results of investment in the ever-fluctuating market.

While variable universal life insurance offers increased flexibility and growth potential over a traditional cash-value, or whole life insurance policies. However, policyholders should carefully assess the risks before purchasing this type of policy.

How Variable Universal Life Insurance Works

Like universal life insurance, variable universal life insurance combines a savings component with a separate death benefit, allowing for greater flexibility in managing the policy. Premiums are paid into the savings component. For a variable universal life insurance policy, the savings element consists of separately managed accounts, referred to as sub-accounts. Each year, the life insurer deducts what it needs to cover mortality and administrative costs. The rest remains in the separate accounts to earn further interest.

In a whole life policy, the life insurer assumes the investment risk by guaranteeing a minimum cash value growth. By separating the savings component and the death benefit component, the life insurer transfers the investment risk of the VUL to the insured. The insured must assume the likelihood that the separate account may generate negative returns, which will reduce the cash value. Significant and sustained losses compromise the cash value. As a result, the insured may need to remit higher premium payments to cover the cost of the insurance and rebuild the cash value.

Variable Universal Life Sub-Accounts

The separate, sub-account 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 and the account in which funds are invested performs poorly, they may need to pay a higher premium to cover the cost of insurance. In addition to the standard administration and mortality fees paid by the policyholder each year, the sub-accounts deduct management fees that can range from 0.05% to 2%. Because the sub-accounts are securities, the life insurance representative must be a licensed producer and registered with the Financial Industry Regulatory Authority FINRA.

The growth of the variable universal life policy's cash value is tax-deferred. Policyholders may access their cash value by taking a withdrawal, or by borrowing funds. However, if the cash value falls below a specific level, additional premium payments must be made to prevent the policy from lapsing.

RELATED TERMS
  1. Universal Life Insurance

    Universal life insurance is permanent life insurance with an ...
  2. Incidents of Ownership

    A person has incidents of ownership if they can change beneficiaries ...
  3. Life Insurance

    Life insurance is a contract in which the insurer guarantees ...
  4. Term Life Insurance

    Term life insurance, also known as pure life insurance, is life ...
  5. Variable Death Benefit

    Variable death benefit refers to the amount paid out at death ...
  6. Traditional Whole Life Policy

    A traditional whole life policy is a type of life insurance contract ...
Related Articles
  1. Financial Advisor

    How Life Insurance Can Help With Cash Accumulation

    Did you know permanent policies also offer the prospect for reasonable cash value accumulations?
  2. Retirement

    Beware the Sneaky Math of Universal Life Insurance

    Universal life insurance's cash value can be a cash cow – if there's any left. Read on to see if it'll work as an income source after you've retired.
  3. Insurance

    How Cash Value Builds in a Life Insurance Policy

    If you have permanent life insurance, more of your insurance premium goes to cash value in the early years of your policy.
  4. Financial Advisor

    Getting Life Insurance in Your 20s Pays Off

    Find out how Americans in their 20s can benefit from a well-thought-out life insurance policy, especially if they are able to build cash value for retirement.
  5. Retirement

    Universal Life Insurance: Dangers for Retirees

    This type of permanent life insurance is often touted as a source of income, but using it that way is full of traps. So, think before you buy.
  6. Insurance

    Choosing Between Whole and Term Life Insurance

    For most people, term life insurance is more suitable than whole life insurance. Here's why.
  7. Financial Advisor

    Index universal life versus whole life insurance: A comparison

    Consumers have choices when it comes to life insurance. Knowing your future needs for cash or retirement can make the difference in what you select.
  8. Insurance

    Understanding Taxes on Life Insurance Premiums

    Learn about the tax implications of life insurance premiums, including when they might be taxable and whether they are tax deductible.
  9. Financial Advisor

    Is Life Insurance From Your Employer Enough?

    Covering the needs of the ones you would leave behind is not easy. But efforts to secure a life insurance policy outside of work should pay off.
  10. Personal Finance

    The Best Life Insurance for Military Families

    Two of the most common types of life insurance are term and whole life. Here's why the latter isn't a good idea for most military families.
RELATED FAQS
  1. What is the difference between term and universal life insurance?

    Term life insurance is the most basic of insurance policies. Universal life insurance falls under a broader category of policies ... Read Answer >>
Hot Definitions
  1. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  2. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  3. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  4. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  5. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  6. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
Trading Center