Variable universal life insurance, or VUL, is a cash-value life insurance policy. It offers a unique set of features that include investments and a death benefit. Consumers are allowed to change their policy as their life circumstances change, yet still be able to build wealth and provide financial protections for their family.
A VUL policy is usually structured so that it includes sub-accounts. These function like mutual funds and allow policyholders to have exposure to bonds or stocks. This allows the policy to provide a better rate of return when compared to permanent insurance or a standard universal policy.
Here are the pros and cons to consider if you’re looking at a variable universal life insurance policy today.
List of the Pros of Variable Universal Life Insurance
1. Many VUL policies offer a cash value feature.
Let’s say that your policy is $60 per month. You must keep paying that $60 each month to have the coverage you want. Now let’s say you have an extra $60 that you also send in each month. The second block of cash goes into your cash value account, which works a lot like a Roth IRA. As this builds cash value, it can eliminate the need to pay insurance premiums in the future. There are also tax advantages to overfunding that may apply to some consumers.
2. Variable universal life insurance offers tax deferment.
In the United States, the cash value investment component of a VUL policy is tax deferred. Whatever death benefits are paid out from the policy are also tax deferred. That means the government will leave the beneficiaries alone should a payout occur. The only real downside to this is that if someone borrows against their cash account, the funds are treated as a loan and that means interest must be paid on the amount.
3. Coverage is permanent.
With a VUL policy, you still receive permanent coverage for your entire life. Your policy cannot be terminated unless you do not make the monthly payments. That means you won’t have to worry about annual medical checkups or losing your coverage because something unexpected happens to you.
4. You are given strategy options for growth.
You stay in control of your financial future when using a VUL policy. Insurance companies should provide several investment strategy options for the cash accumulation component of the policy. Three common choices are a general interest account, a guaranteed one-year payout, or an equity index strategy.
5. VUL policies are very flexible.
Your financial picture may change over time. You might earn more, or you may earn less. Your policy can be adjusted so you can pay a higher premium when times are good, then pay a lower premium when you need a little extra income. You can also make changes to your premiums when you suspect the markets may be performing well or performing poorly. That way, you can build wealth through whatever interest crediting strategy works best for you.
6. Your cash account can pay your premium.
If there is a month or two where you’re just strapped for cash and can’t make your premium payment, then the cash portion of your policy can make it for you. This design ensures that you keep the VUL policy active while managing your local cash resources to meet your needs. If you haven’t built-up your cash account feature, however, then there would be no value to make those payments and you would lose the policy.
List of the Cons of Variable Universal Life Insurance
1. VUL policies are much higher than other forms of life insurance.
A universal life insurance policy is typically up to 4 times the cost of a term life insurance policy. If you’re looking for a universal life policy that is guaranteed, a standard policy will typically be 20% less than a VUL policy. The goal of VUL coverage is to provide multiple options for financial security instead of just one with a tax-deferred benefit. For households with lower incomes, it may not be the correct insurance product to use.
2. Mortality payments may change over time.
There are two types of mortality coverage that are usually offered with a VUL policy. The first is called LCOI – or “level cost of insurance.” This type of coverage never changes, so the mortality payment remains the same. The second option is called YRT – or “yearly renewable term.” That does change the mortality portion of the premium. Younger consumers will usually find the YRT option to be cheaper for them, while older consumers typically prefer the LCOI option.
3. You lose the interest on your own money.
One of the positive features of a universal life insurance policy is that it builds a cash value that can be borrowed against. What many borrowers do not realize is that borrowing from the cash value of the policy is treated as a loan. The insurance company charges interest on the funds that must be paid, even though you’re using your own money. That interest doesn’t go into your policy. It goes straight to the insurance company.
4. Variable universal life insurance requires constant monitoring.
A VUL policy is essentially an investment portfolio. You must keep an eye on your overall cash value to ensure it continues to build. It is not the type of product that you can just file your statements away when you receive them. You must request in-force illustrations periodically to ensure the performance of your account is where it should be. For those who want a policy that they can pay for without supervision, a term life option may be better.
5. It won’t build a huge cash value.
If you use cash overpayments to stuff your policy, you may find that the interest rates provide a smaller return than other investment options. The interest rates that are offered for VUL policies are often quite conservative, even when compared to the current interest rate. Penn Mutual currently offers a 2% interest rate on a holding fixed account and a 3.5% rate on a traditional fixed account, but only in their diversified growth VUL indexed product.
These variable universal life insurance pros and cons indicate that this type of policy can be beneficial to a certain segment of consumers. It provides a needed death benefit and offers a cash accumulation feature that can keep the policy active if the premium payments cannot be made. It can also cost more than other types of insurance.
Take your time when evaluating this and other insurance products to ensure you get the right coverage to meet the needs of you and your family.