Index | Life Insurance | Variable Universal Life Insurance
Variable Universal Life Insurance
Variable Universal Life Insurance (often shortened to VUL) has become a more popular type than Variable Life Insurance in the USA. As its name suggests, it combines the essential features of both Variable Life Insurance and Universal Life Insurance. The "variable" component refers to a number of investment options similar to mutual funds you can allocate your premiums to. The "universal" component refers to the flexibility the policyholder has in making premium payments.
With this Life Insurance plan you can adjust both your death benefit and your cash value. After you pay the initial premium determined by the contract features, you are free to decide when and how much you want to invest in your policy. Your premium payments in excess of administrative costs and the cost of the insurance are funded into variable investment options according to your choice (e.g. stocks, bonds, money market funds, equity funds, bond funds, etc.). The death benefit and the cash value in your policy can increase or decrease; depending on the success of the underlying funds you choose to invest in. To maintain a death benefit guarantee you will have to pay a specified premium amount on a monthly basis. If there is enough cash value in your policy to cover the monthly cost of your insurance, you do not need to pay any premium to keep the policy in force as the tax-free investment returns can be used to cover the costs of your Life Insurance inside the policy. With orientation toward the consumer, today many Variable Universal Life policies offer a guarantee that the death benefit will remain at a certain level irrespective of the performance of the separate accounts, provided a fixed minimum premium is paid for a predetermined number of years.
Variable Universal Life Insurance gives you more control over your cash value component than any other type of Life Insurance. Due to the stability of the stock market operation, Variable Universal Life policies provide an opportunity to build up sizeable cash value without incurring current income tax as long as your policy qualifies for Life Insurance and remains in force. All these inherent features together with an option that allows you to exercise control over your investment add to the flexibility normally ascribed to Variable Universal Life Insurance.
The flexibility inherent in the policy of this type also manifests itself in the provision according to which you can withdraw your cash value or borrow money against the policy's cash value during your lifetime. Because of its loan feature Variable Universal Life Insurance proves to be a convenient investment vehicle as it can cushion the blow caused by considerable expenses associated with the usual attributes of decent life. The cash value of Variable Universal Life Insurance can be used as a tax-advantaged income source for retirement and estate planning as well as for children's education. However, you should remember that your policy's face amount is reduced by the amount of a withdrawal, and that withdrawals are not always tax-free. If the maximum amount of the premium is exceeded, the policy turns into a modified endowment contract (MEC) which ensures the death benefit with investment returns but withdrawals of the cash value are subject to taxes as ordinary income. Further, if the cash value exceeds the specified percentage of the death benefit, the policy no longer qualifies as Life Insurance.
Variable Universal Life Insurance proves a convenient saving strategy for those in high tax brackets. Because of its tax-deferred feature Variable Universal Life Insurance offers an attractive tax advantage and if your policy is highly funded, tax advantages can and generally do reimburse the cost of the policy.
Variable Universal Life Insurance can procure protection against inflation. And it takes into account that your insurance needs may change over time. Therefore, before going in for Variable Universal Life Insurance you should consider your individual circumstances and the standard of living you want your family to maintain. You should also make sure that your insurance company enjoys high ratings from major rating services. Rates and coverage vary from state to state and from company to company. In case you plan your coverage carefully and in accordance with your needs, the chances are that your policy will work for you.
Alongside evident advantages of this type of Life Insurance policies, there are disadvantages you should be aware of if you are thinking about purchasing this plan. Variable Universal Life policies are usually more expensive than any other type of Permanent Life Insurance. Moreover, the cost of the insurance can fluctuate as it depends on the current term rates which may increase or decrease. On average, the cash required to keep a VUL policy in force is much higher than with other types of insurance policies.
Besides, VUL is a complex financial product and you should have at least some basic knowledge of securities, stocks and bonds to make this insurance profitable. Otherwise you will hardly be able to manage your policy successfully on your own.
So, Variable Universal Life Insurance can provide you with a choice of underlying investment accounts, flexible premiums and adjustable death benefit. This type of Life Insurance can provide you and your dearest and nearest with financial protection and the element of long-term investment, but you must have a fundamental knowledge and understanding of stocks, bonds and securities.
In general, Variable Universal Life Insurance is characterized by a high level of financial protection despite the potential risks involved. As a permanent policy, Variable Universal Life Insurance will not lapse if it is funded correctly. And it will safeguard the family in case of a premature death of the insured. What is more important, the advantage of Variable Universal Life Insurance is that it is not the type of insurance that pays off only after you are gone. It can help protect your family now and improve your financial status during your lifetime.