What Is Variable Universal Life Insurance? Definition and How It Works
Variable universal life insurance (VUL) offers flexibility, but it also comes with investment risk.
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Key takeaways
Variable universal life insurance is a permanent policy with a flexible death benefit and premiums.
VUL policies allow you to allocate cash value into subaccounts, and then to invest that cash value in stocks, bonds or money market funds.
Because you could lose money, a VUL policy is best suited for those with a moderate risk tolerance.
Variable universal life insurance (VUL) is a life insurance policy with a cash value component that earns interest over time. VUL is appealing to some people because both the premiums and death benefits are adjustable. These policies offer high potential growth and flexibility. But because they’re risky, they’re not suitable for everyone.
What is variable universal life insurance (VUL)?
Variable universal life insurance is a type of permanent life insurance with adjustable premiums. It pays a death benefit to your beneficiaries when you die and also includes a cash value component that you can invest in your choice of various subaccounts similar to mutual funds.
The cash value fluctuates based on how your investments perform. There’s high potential cash value growth if your investments perform well, but you could lose money if your investments fare poorly.
Variable universal life policies represent a relatively small slice of the U.S. life insurance market, making up 14% of sales by premium in 2024, according to LIMRA, a life insurance research group.
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How does variable universal life insurance work?
As with any permanent life policy, part of your VUL premium goes toward the cost of insuring your life. The rest of the money is funneled into the savings component of the policy, known as the cash value.
When you buy a VUL policy, you’ll allocate your cash value into various subaccounts of your choice. You can usually invest in stocks, bonds, money market funds or a combination, depending on your goals.
The cash value isn’t guaranteed, though, and neither is the death benefit. Strong market performance can lead to greater cash value accumulation, but poor performance can reduce your cash value.
Variable UL is best known for its flexibility. You can adjust your death benefit if your insurance needs change, although increasing it may require a medical exam. If you have enough cash value, you can use the money to skip premiums or stop paying them altogether. You can also withdraw cash value or borrow against it, but keep in mind it can take 10 or more years to build up enough cash value to be able to do that.
If your cash value dips below the amount needed to cover policy costs, you may need to pay a higher premium. Otherwise, you run the risk of your policy lapsing, leaving you without life insurance coverage.
Pros and cons of VUL
Pros of variable universal life insurance
Flexible premiums and death benefit | VUL policies let you adjust or even skip premium payments if you have enough cash value. You can also increase or decrease your death benefit if your needs change. |
Permanent coverage | Like other permanent policies, VUL typically lasts your entire life. Life insurance death benefits are generally tax-free. |
Potential cash value growth | If your investments perform well, your cash value will grow and your beneficiaries could receive a higher payout. You can borrow against the cash value or withdraw it. Some people use the funds to supplement their retirement income. |
Cons of variable universal life insurance
Risk of poor investment performance | If your selected investments perform poorly, you could lose money. Your policy may lapse if you don’t maintain sufficient cash value. |
Requires regular monitoring | VUL requires you to consistently monitor your investment performance and your policy’s cash value. If you prefer a hands-off approach to life insurance and finances, VUL isn’t a great choice. |
High fees | The fees on a variable universal life policy can be substantial. In addition to sales and administrative fees, you’ll also indirectly pay the underlying fund expenses for the investments you choose. Many insurers also charge a fee if you cash out the policy for its cash surrender value in the first 10 to 15 years. |
Is VUL worth it?
VUL could be worth considering if you want permanent life insurance and you’re comfortable having your cash value fluctuate based on market performance. A variable universal life insurance policy may also make sense if you’re already maxing out your retirement accounts and want another way to invest tax-deferred money.
Alternatives to VUL
If VUL isn’t the right fit, another type of life insurance might better suit your needs:
Term life insurance offers coverage for a set number of years, like 10 or 20. It’s simple, affordable and sufficient for most people. It doesn’t have a cash value component, so it’s also known as “pure” life insurance.
Whole life insurance is a permanent policy. Unlike with VUL, premiums are fixed and the death benefit and cash value growth rate are both guaranteed by the insurer.
Universal life insurance is permanent coverage with cash value. As with VUL, it has a flexible death benefit and premiums. The key difference is that cash values in a universal life policy grow at an interest rate set by your insurer, whereas VUL cash value growth is determined by the performance of investments you choose.
Indexed universal life insurance also offers an adjustable death benefit and premiums, but the cash value growth is capped and tied to the performance of a stock index like the S&P 500. IUL policies usually have a floor rate to minimize your losses if the stock market goes down, making these policies less risky than VUL.
Variable life insurance is a permanent policy with a fixed premium and death benefit, but it’s similar to VUL in that your cash value grows based on the underlying investments you select. Variable life insurance is an older product that most life insurers no longer sell.
How to buy VUL
To buy a variable universal policy, you’ll need to work with someone licensed to sell both securities and life insurance. It’s important to review the prospectus carefully, along with the life insurance illustration, which shows you how the policy’s cash value, death benefit and premiums could change under various scenarios.
Due to life insurance commissions, someone who’s selling you a policy may be influenced by the amount of compensation they could earn. Before signing a contract, consider hiring a fee-based insurance consultant to review the policy. Because their pay isn’t contingent on selling you a product, they may be better positioned to offer objective advice.
It’s also essential to research your life insurance company’s financial stability. You can do so by checking out ratings provided by a company like AM Best. NerdWallet recommends looking at insurers with an AM Best rating of A- or higher.
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