A Guide to Variable Life and Variable Universal Life Insurance

Variable and variable universal life insurance require buyers to invest wisely. Risks and rewards both are high.
Jun 11, 2020
A Guide to Variable Life and Variable Universal Life Insurance

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Variable universal life and variable life insurance are investment products with a life insurance twist. They’re designed for people who:

  • Plan to pay active attention to their investments.

  • Can fund a policy heavily in its early years.

  • Are willing to add stock market risk to their life insurance.

For those people, variable life and variable universal life offer the most potential growth of any life insurance — but they also come with some of the biggest risks.

What is ‘variable’ life insurance?

Variable life insurance is a type of permanent life insurance with a flexible death benefit — the amount paid when you die.

Variable universal life insurance, often called VUL, has a similar flexibility in its death benefit, while also offering adjustable premium payments.

Both types of insurance rely on mutual fund-like investments that you choose. That means more risk and more potential for growth compared with other permanent insurance options, like whole life or universal life insurance.

Investing with variable and variable universal life insurance

Like all permanent life insurance, variable life and variable universal life policies come with a cash account funded by premium payments. You send in a check, your cost of insurance and other fees are taken out and the rest is deposited in your cash account.

With any “variable” policy, you’ll be able to invest that cash as you see fit — with some limitations. Your insurance company will let you know your options, and then you can choose based on your investment strategy.

If these investments do well, you’ll increase the death benefit payable to your beneficiaries when you die. If not, the insurer will pay any minimum guaranteed death benefit, as long as you’ve made all your required premium payments. Keep in mind, variable universal products often don’t come with a guaranteed death benefit.

If you’re thinking about buying either variable version of life insurance, make sure to understand the risks and policy structures before making a purchase. With any permanent life insurance purchase, it’s always helpful to consult a fee-only financial planner who can help you understand all the financial implications of a policy.

Differences between variable and variable universal life insurance

Variable life insurance and VUL both have a variable death benefit. The amount they pay out is determined by how well your cash account investments perform. They also share some other traits, such as:

  • Control over what you’ll invest in.

  • Stock market investment rates without caps.

  • Increased reliance on your investing experience.

  • The chance your investments could drop in value.

While there is some overlap, variable life and VUL are different products. Variable life is more like whole life insurance, while variable universal life is more like universal life insurance.

Variable universal life insurance at a glance

Variable universal life insurance gives owners more control than other types of life insurance products. Of the two “variable” options, variable universal life is the more popular. That doesn’t mean it’s wildly popular in general. At the beginning of 2020, VUL made up just 7% of U.S. life insurance sales by premium. Its small share is due to one simple fact — "variable" insurances aren't designed for most people.

These are products for investors who are comfortable with riskier life insurances. Most buyers will be better off — and sleep more soundly — with a term life, whole life or even universal life option.

Variable universal life offers:

  • Adjustable premium payments.

  • No guaranteed death benefit, unless you pay a fee.

As you can see, the benefit of VUL is also its drawback. You’ll be in charge of your own performance with few guarantees. If you make poor choices, you can easily end up owing more than you’d planned or lose coverage entirely.

Variable life insurance at a glance

Variable life insurance allows you to set a minimum death benefit, with the potential to pay out more depending on how your investments do. It’s older and less popular than variable universal life, but you can still find policies.

Variable life insurance offers:

  • Fixed premium payments over the life of the policy.

  • More death benefit guarantees.

Variable life insurance appeals to investors who are concerned about getting more out of their life insurance than just a death benefit, but who like the regularity of premium payments offered in whole life insurance policies.

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Benefits of variable universal life and variable life insurance

Variable life and VUL both give you more control over your investments and a higher potential return than other life insurance options. For people who see life insurance as both a form of protection and an investment, variable options can solve two problems at once.

Variable universal life provides the most life insurance control and flexibility. Premiums can move up and down, death benefits can be increased or dropped and you can choose to put your cash into a wide range of investment options or fixed-rate products.

Drawbacks of variable and variable universal life insurance

Variable life and VUL both combine an investment and an insurance policy. The federal government requires people who sell variable policies to be registered to sell securities — stocks and the like — as well as life insurance. That should tell you that variable insurance products are more complex than their vanilla counterparts.

It also highlights the market risks that come with these policies. If the market performs poorly, you could be left without any value in your cash account. Many people prefer less hands-on options with more guarantees. For instance, indexed universal life, which pays interest based on stock indexes, has been gaining momentum for the last three years.

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