About Variable Universal Life Insurance

Variable universal life insurance polices are a hybrid between permanent life insurance and mutual funds. These policies offer the greatest range of customization but also involve the greatest risk of all types of insurance. A VUL policy is also the most complex form of insurance policy because of the many factors involved, both good and bad. These policies are only sold by licensed agents who work for companies specifically designated to sell VUL policies by their respective state.

Identification

Variable universal life Insurance is a form of permanent life insurance policy. Permanent life insurance policies have a death benefit which is paid out when the policy holder dies. This policy is similar to whole life Insurance because it allows a cash buildup over the life of the policy. Unlike whole life policies, the death benefit is considered to be the face value of the policy plus any cash built up over the term of the policy above the face value; whole life simply allows up to the face value of the policy. A VUL policy also is considered an investment tool as well as a retirement or savings plan similar to mutual funds because it is tied to market flux and values.

Function

This type of life insurance has three functions:
• The variable function -- this is the ability to invest money into separate accounts with various values because of their ties to stock or bond markets.
• The universal function -- this gives the function of flexibility to the premium payments which can vary from zero to the maximum allowed by the Internal Revenue Service.
• The life insurance function -- this function provides the death benefit if the cash value is high enough to cover the amount.

Features

The various features of a VUL policy can be placed into five categories:
• Tax advantage -- a VUL has a tax-deferred feature. If the policy is highly funded, the tax benefits can offset the cost of the policy.
• Education -- cash values in VULs can fund your children's education if you start the policy very early in their lives.
• Financial need -- a VUL can aid a family financial crisis in a situation of sudden or premature death. A VUL is a permanent policy which is much less prone to lapses unlike a term insurance policy when payments cannot be made
• Estate planning -- a person with a large estate can use a VUL policy as a life insurance trust, which can reduce the estate taxes at the time of death.
• Retirement -- a VUL also has a tax-free loan feature. Because of this the policy can become an income source for retirement given that retirement is not in the immediate future.

Benefits

Variable Universal Life Insurance has many benefits in regards to both financial and tax issues.

Some of the tax benefits include:
• Federal income tax is deferred on any gain in account value.
• The death benefit to beneficiaries is mainly free from federal taxes.
• Account values can be moved between investments from within the policy without having to pay federal income tax.

Some of the financial benefits include:
• The allowance to withdraw or borrow money from the policy during your lifetime.
• Providing a hedge against inflation because of the policy ties to securities, thereby keeping the value of the policy intact.
• The ability to place premiums with a variety of investment options.

Warning

Because a VUL offers investment elements, this type of insurance policy carries a degree of risk. Because of this risk there are potential problems with this type of policy.
• Account values will fluctuate over time and may go below the amount of premiums paid.
• If deposits into the investments have a negative return over several years you will need to increase the premium to continue the death benefit.
• Borrowing too soon in the life of the policy can result in higher premiums needed to continue the death benefit for the policy.
• VUL policies are not an insurance policy which can be set up and simply paid into without monitoring over time.
• VUL polices are affected by changes in interest rates, performance of markets, value of currencies and industry trends.

Considerations

When considering the purchase of a VUL policy, the following issues must be taken into account:
• VUL policies may have lower premiums than whole life because the management and risk for the policy is placed with the policy holder, not the insurance provider.
• Insurance companies may let you reallocate the cash values several times each year without additional fees.
• It can be possible to skip payments for a year provided you have several years of payments and positive returns on investments in the account.
• The death benefit can always be adjusted downward. To increase the death benefit you may pay an extra-cost rider.
• You need a basic understanding of securities and investments to use this type of policy.
• You will be responsible for the management and cash flow of the investment accounts within the policy.
• These policies can lose value over time.
• This is not a short-term investment vehicle.
• As with mutual funds, VUL polices have a prospectus and investment guidelines which must be read and understood before purchase.