Variable Universal Life (VUL) Insurance

Variable universal life (VUL) is a form of permanent life insurance that combines lifelong death benefit protection with a cash-value account you can invest in subaccounts that function much like mutual funds. It offers flexibility in premium payments and investment choice, but places investment risk and many costs on the policyholder.

Key takeaways

• VUL blends permanent life insurance with an investment component whose returns are tax-deferred.
• Policyholders choose subaccounts (stocks, bonds, money market, ETFs, mutual funds, or a fixed-interest option) and bear the investment risk.
• Premiums are flexible, but you must pay enough to cover insurance costs; poor investment performance can require higher premiums to keep the policy in force.
• VUL typically carries high fees—mortality and administration charges plus subaccount management fees (often 0.5%–2%)—and may include surrender charges.
• Suited to individuals who want permanent coverage, have higher risk tolerance, and prefer managing investment options within a life policy.

How VUL works

• Premiums are paid into the policy. The insurer deducts insurance costs (mortality and administrative fees); the remainder goes into the policy’s cash value.
• The cash value is allocated among insurer subaccounts that invest in market instruments. Performance of those investments determines cash-value growth.
• Cash value grows tax-deferred and can be accessed via withdrawals or policy loans (subject to policy terms).
• If investment returns are poor and cash value is insufficient to cover insurance costs, the policyholder must increase payments to avoid lapse.

Investment options and fees

• Subaccounts are structured like mutual-fund families (equity, bond, money market, etc.). Some policies limit free transfers between funds and charge fees for excess moves.
• Because subaccounts are securities, agents selling VUL must be properly licensed and registered.
• Typical fees include:
• Mortality and expense charges
• Policy administrative fees
• Subaccount management/expense ratios (commonly 0.5%–2%)
• Possible transfer or change fees
• Surrender charges if the policy is canceled early (often highest in the first 10–15 years)

Advantages

• Potential for higher cash-value growth compared with other permanent policies when markets perform well.
• Flexible premiums—policyholders can adjust payment amounts (within policy limits).
• Investment choice allows tailoring to risk tolerance and objectives.
• Tax-deferred accumulation within the policy.

Drawbacks and risks

• Investment risk rests with the policyholder—no guaranteed cash-value return (unless a separate fixed option exists).
• High total cost (insurance + investment fees) can reduce net returns versus investing directly.
• Risk of policy lapse if cash value falls and premiums aren’t increased.
• Surrender penalties can be significant early in the contract.
• More complex to manage than term, whole, or plain universal life policies.

Who should consider VUL

VUL may be appropriate for people who:
* Want permanent death benefit protection.
* Have a higher tolerance for investment risk.
* Prefer control over investment allocations within a policy.
* Seek additional tax-deferred accumulation beyond retirement accounts (after evaluating other options).

Not suitable for those who want simplicity, guaranteed returns, or low-cost coverage.

Alternatives to consider

• Variable life: Market-invested cash value like VUL, but typically fixed premiums and sometimes a guaranteed minimum death benefit.
• Universal life: Flexible premiums; cash value grows based on interest crediting with often a guaranteed minimum—less market exposure than VUL.
• Whole life: Fixed premiums, guaranteed death benefit and cash-value growth—more conservative and predictable.
• Term life: Low-cost temporary coverage without cash value—savings on premiums can be invested separately.

FAQs

What does VUL stand for?
* Variable Universal Life.

Is VUL a good investment?
* As an insurance product, VUL can produce higher cash-value growth in strong markets, but fees and insurance costs often make it less efficient than investing directly through a brokerage. It is primarily an insurance policy with an investment feature, not a pure investment vehicle.

What can VUL policies invest in?
* Investment options vary by insurer but usually include stock and bond subaccounts, money market options, mutual funds or ETFs, and sometimes a fixed-interest account.

Bottom line

VUL combines lifelong insurance with market-based investment options and flexible premiums. It offers growth potential and tax-deferred accumulation, but also significant complexity, fees, and investment risk. Compare VUL carefully with other life insurance and separate investment alternatives to determine whether its trade-offs fit your financial goals and risk tolerance.