Variable Universal Life (VUL) Insurance: What It Is, How It Works

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Updated June 14, 2022
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Marguerita Cheng
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Reviewed by Marguerita Cheng
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Marguerita is a Certified Financial Planner (CFP®), Chartered Retirement Planning Counselor (CRPC®), Retirement Income Certified Professional (RICP®), and a Chartered Socially Responsible Investing Counselor (CSRIC). She has been working in the financial planning industry for over 20 years and spends her days helping her clients gain clarity, confidence, and control over their financial lives.

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What Is Variable Universal Life (VUL) Insurance?

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

VUL insurance has investment subaccounts that allow for the investment of the cash value. The function of the subaccounts is similar to a mutual fund. Exposure to market fluctuations can generate significant returns, but may also result in substantial losses. This insurance gets its name from the varying results of investment in the ever-fluctuating market. While VUL insurance offers increased flexibility and growth potential over a traditional cash value or a whole life insurance policy, policyholders should carefully assess the risks before purchasing it.

Key Takeaways

  • Variable universal life (VUL) insurance is a type of permanent life insurance policy that allows for the cash component to be invested to produce greater returns.
  • VUL insurance policies are built like traditional universal life insurance policies but let you invest the cash value in the market via subaccounts.
  • As a result, the return to the cash component is not guaranteed year after year.
  • VUL policies are not intended to be standalone investments, but rather a form of life insurance.

How Variable Universal Life (VUL) Insurance Works

Like universal life insurance, VUL 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 VUL insurance policy, the savings element consists of separately managed accounts, referred to as “subaccounts.” 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.

Two Components

In a whole life policy, the life insurer assumes the investment risk by guaranteeing a minimum cash value growth. The life insurer transfers the investment risk of the VUL policy 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.

Unlike whole life insurance, the life insurer transfers the investment risk of the VUL policy to the insured.

Subaccounts

The separate subaccount 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.

Special Considerations

In addition to the standard administration and mortality fees paid by the policyholder each year, the subaccounts deduct management fees that can range from 0.05% to 2%. Because the subaccounts are securities, the life insurance representative must be a licensed producer and registered with the Financial Industry Regulatory Authority (FINRA).

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

What Is VUL in Insurance?

VUL stands for variable universal life. It is a variation on a standard universal life policy that allows for some of the cash value accumulated to be invested into the market and earn a return.

Is VUL a Good Investment?

As an insurance product, VUL may be able to boost returns in the policy during bull markets. However, as a standalone investment, VUL will not be able to match the performance of investing directly in the market. This is because the fees and the cost of the insurance component will drag down the total return.

What Can VUL Policies Invest In?

The exact investment options will vary among insurance companies, but almost all VUL policies allow investments in stocks, bonds, money market securities, ETFs, and mutual funds, as well as a guaranteed fixed-interest option.

Article Sources
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  1. FINRA. "Insurance."

  2. U.S. Securities and Exchange Commission. "Investor Bulletin: Variable Life Insurance."

  3. Allstate. "What Is Variable Universal Life Insurance?"

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