What Is Variable Universal Life Insurance? Definition and How It Works

Variable universal life insurance (VUL) is a life insurance policy with a cash value component. VUL policies earn cash value based on the performance of investments.

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.

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. You can invest in your choice of various subaccounts that mirror a mutual fund but won't be exactly identical.

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.

VUL policies represent a small slice of the U.S. life insurance market, making up 15% of sales in 2025, according to LIMRA, a life insurance research group

^[1]

LIMRA. Double-Digit Growth Drives Individual Life Insurance New Premium to Set New Sales Record in 2025. Accessed Oct 9, 2026. View all sources .

» MORE: Cash value life insurance

Variable universal life insurance can be complex and tricky to manage. Here’s what you need to know about how these policies work.

Premiums pay for the cost of insurance first

As with any permanent life policy, part of your VUL premium goes toward the cost of insuring your life and other policy expenses. The rest of the money is funneled into the savings component of the policy, known as the cash value.

Cash value goes directly into investments of your choice

When you buy a VUL policy, you’ll allocate your cash value into various subaccounts of your choice. You can usually invest in stock or bond funds or a combination, depending on your goals.

Cash value growth and death benefits are not guaranteed

The cash value isn’t guaranteed, though, and neither is the death benefit. Strong market performance can lead to greater cash value growth, but poor performance can reduce your cash value.

Death benefits are adjustable

VUL 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.

There’s a risk of policy lapse

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.

» MORE: How much life insurance do you need?

Pros of variable universal life insurance

Cons of variable universal life insurance

While variable universal life insurance shares features with other types of cash value life insurance, it involves more risk and is essentially an investment product. Your policy’s subaccounts are directly invested in the market, and there are no caps or floors to limit loss or risk of policy lapse.

For most life insurance, you’ll only pay income tax on money you withdraw from the policy to use as a loan or income. And only if that sum exceeds what you paid in premiums, which is referred to as the policy basis.

However, overpaying your premiums could result in the IRS classifying your life insurance as a modified endowment contract (MEC). This means that in the future, any withdrawals from the cash value of your policy would be taxed as income. Speak to a tax professional to understand the potential implications and how to avoid them.

» MORE: Is life insurance taxable?

VUL could be worth it if you want permanent life insurance and you’re comfortable having your cash value fluctuate and monitoring it closely.

A variable universal life insurance policy may make sense if you’re already maxing out your retirement accounts and want another way to build cash value tax-deferred. But because these policies are complex, they're only advisable as tools for experienced investors.

» MORE: The best life insurance companies

VUL isn’t the right fit for most people. Here are other types of life insurance that 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 and the death benefit are fixed. Cash value grows at a fixed rate guaranteed by the insurer.

» MORE: Best term life insurance

To analyze 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. This 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.