I started Insurance Blog by Chris™ because I have a passion for insurance. Here at the blog, our job is to educate and inform people about the best insurance for them. Since then, we have grown into national brands with a large team of researchers helping people understand all forms of insurance.

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Written by Chris Huntley
Founder of Huntley Wealth & Insurance Services Chris Huntley

Rachael Brennan has been working in the insurance industry since 2006 when she began working as a licensed insurance representative for 21st Century Insurance, during which time she earned her Property and Casualty license in all 50 states. After several years she expanded her insurance expertise, earning her license in Health and AD&D insurance as well. She has worked for small health insu...

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Reviewed by Rachael Brennan
Licensed Insurance Agent Rachael Brennan

UPDATED: Apr 18, 2022

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To develop more competitive financial products, the life insurance industry has created some very interesting and complicated policies.

Perhaps the most complex is the variable universal life insurance policy, commonly referred to simply as “VUL”.

Variable is the operative word in the title because the various provisions of the policy can be adjusted, both at the time the policy is taken and just about any time thereafter.

In most respects, VUL insurance is a variation of whole life insurance.

That’s because it’s a permanent policy that offers both a death benefit and an investment provision. But, that’s pretty much where the similarities end.

The many flexibilities of variable universal life insurance make it a substantially different life insurance product.

What is Variable Universal Life Insurance?

Variable universal life insurance is most similar to indexed universal life insurance (IUL), except that it does involve substantially more risk with the investment provision.

Similar to indexed universal life, VUL is primarily an investment vehicle that also offers a life insurance provision.

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How Does Variable Universal Life Insurance Work?

You pay an annual premium, which is allocated between administrative costs, agent commissions, life insurance coverage, and the accumulation of your cash value.

But, unlike a whole life insurance policy, which provides a guaranteed annual interest rate of return, or an indexed universal life insurance policy that’s set up to make it virtually impossible to lose money on investments in your cash value, VUL cash values are invested much more aggressively. And they do have the risk of loss.

The cash value of your policy will be invested in insurance subaccounts, which are basically insurance industry mutual funds.

However, unlike mutual funds, insurance subaccounts aren’t available to the public. They are proprietary funds available only to customers of that insurance company.

The number of subaccounts offered by insurance companies can vary, but you’ll often have dozens of choices. Similar to a mutual fund family, there will be funds tied to various indexes (like the S&P 500) or very specialized industry sectors. You’ll be able to choose a mix of several that meet your investment needs.

However, in a major departure from indexed universal life insurance investment products, there are no caps on the amount you can earn on your subaccounts with a VUL.

But, neither is there an income floor to protect you if a fund drops in value. That holds the potential to a) earn higher returns in years with stronger investment performances and b) experience potentially large losses in years when markets perform poorly.

Put another way, you can lose money in the investment portion of your VUL policy. Neither the investment returns nor the principal invested is in any way guaranteed by the insurance company or any government agency.

Variable Death Benefit

One of the basic features of a VUL policy is that the death benefit is fully adjustable. You can start out with a death benefit of $300,000, then lower it to $200,000 in five years, and $100,000 in 20 years.

This can be an important strategy if investing is the main purpose of taking a VUL insurance policy, which it usually is.

Keeping that in mind, there’s something of a push-pull in a VUL policy. The larger the death benefit of your insurance policy, the larger the portion of your premium that will go toward that part of the policy. That means less money will go into your cash value and investment provisions.

And since VUL insurance policies are typically based on an annual renewable term policy, the annual cost of the insurance provision will increase each year as you age.

That being the case, you’ll have to either reduce the death benefit in your policy, or increase your annual premiums to cover the additional cost of the life insurance provision.

VUL Loan Provision

As is the case with just about all cash value life insurance policies, VUL insurance policies come with a loan provision.

You can borrow at the cash value of your policy, at a very low-interest rate. What’s more, the funds you receive from the loan will generally have no tax consequences.

One issue of concern, however, is that the loan will ultimately be paid out of the death benefit of your policy upon your death.

If the amount of the loan proceeds paid out of the policy exceeds your net contributions to the plan, there will be tax consequences.

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VUL Insurance Fees

If you’re even considering a VUL policy, you’ll need to be thoroughly familiar with the many fees involved.

This is a major reason we don’t recommend this type of life insurance policy for most consumers.

VUL policies are heavy on numerous fees, many of them large in size.

Fees You Should Expect to Incur With a VUL Policy:

  • Insurance agent commission. One of the reasons insurance agents are so anxious to sell you a VUL policy is because they’re paid a very generous commission on the sale. This is typically based on a sliding scale, with the commission spread over several years. Unfortunately, the largest commission payment will occur in the first year and decline each year thereafter. It wouldn’t be unusual for 50% of your first-year premium to go for the insurance agent’s commission. For example, if you pay a $20,000 premium, the insurance agent could conceivably get half of it. That means relatively little of your premium will go into the cash value, or even, necessarily, in the life insurance provision. It also holds the possibility your policy will have a negative value after the first year. Because of the multiyear commission structure, it may take you several years to build large cash value for investment purposes.
  • Administrative costs. As complex policies, VULs involve significant administrative fees. These are charged each year to manage the policy. It’s possible the administrative fees can eat up anywhere from 5% to as much as 15% of your premium each year. Once again, this means less of your premium will be going into the cash value.
  • The cost of life insurance. At least part of your premium will go to cover the cost of your life insurance premium. As each year passes, the premium will be a little bit higher, based on your age at the time of renewal. The life insurance costs will consume progressively more of your premium the longer your policy is in force.
  • Subaccount fund fees. Much like mutual funds, insurance investment subaccounts add fees. Unfortunately, those annual account fees are higher than the typical publicly traded mutual fund, and much higher than those charged on exchange-traded funds are. You can expect to pay annual fees on those accounts ranging between 0.5% to as much as 3%. If the annual fee on a fund is 2%, and the fund earns 10%, you’ll only receive a net return of 8% on your investment.

The Benefits of VUL Insurance

  • Flexibility. Unlike a whole life insurance policy, the various provisions within a variable universal life insurance policy can be adjusted. You can change the amount of life insurance you have, and increase the portion of your premium that goes into your cash value.
  • Investment provisions. A VUL policy serves primarily as an insurance sponsored investment account. That will give you many more investment options than you will find in a whole life insurance policy. You’ll be able to participate fully in the gains provided by your investment subaccounts, giving you an opportunity to earn real-world returns in the market.
  • Investment earnings are tax-deferred. The investment earnings in your account will accumulate on a tax-deferred basis. That will give you the benefit of compounding on the full amount of your investment returns throughout the term of your policy. The investment earnings will only be taxable when withdrawn, and then only to the extent that they exceed the value of your contributions to the policy.
  • Potential tax-free withdrawals. You can make withdrawals from your plan either by taking a loan or by making withdrawals of amounts you have contributed to the plan. Much like a Roth IRA, the VUL allows you to withdraw the full amount of your contributions to the policy before any investment earnings are taken. That means the amount of your withdrawals—up to the total amount of your plan contributions—can be taken with no tax consequences.
  • Can be an excellent retirement savings supplement. Virtually all retirement plans limit your contributions. For example, the most you can contribute to a 401(k) is $19,500 per year, or $26,000 if you are 50 or older. The most you can contribute to a traditional or Roth IRA is $6,000 per year, or $7,000 if you are 50 or older. If you’ve reached those limits, and you want to contribute more toward your retirement—perhaps because you want to retire early—there’s no limit on how much you can put into an VUL policy. It can be a valuable additional investment account to supplement what you have in your retirement plans.

The Disadvantages of VUL Insurance

  • You may do better investing on your own. Despite the impressive investment results and charts, an insurance agent will show you, the investment returns on a VUL policy are very likely to be less than what you could get if you invested on your own. If you simply invest your money in an exchange-traded fund based on the S&P 500 index, you’ll average 10% per year. While you may get the same total return on your VUL subaccounts, investment fees will reduce the net return on your investment. The difference of 1% or 2% per year can make a huge difference over several decades.
  • Premiums paid to your VUL are not tax-deductible. This is generally true of most types of life insurance. But, since a VUL is primarily an investment vehicle, the lack of tax deductibility could be a problem, particularly for anyone who does not customarily max out his or her formal retirement plan contributions.
  • High fees. We’ve spent a good bit of time covering the many fees involved in a VUL policy. Those fees should not be taken lightly. Commissions alone—taken primarily in the early years your policy is in force—will substantially reduce the cash value of your policy. Meanwhile, administrative fees, investment expenses, and a steadily rising cost of your life insurance coverage will further reduce the cash value of your policy.
  • Tax consequences may apply if your plan withdrawals exceed your contributions. If your withdrawals from your policy exceed the value of your contributions, you may incur a tax liability on the excess amount withdrawn.
  • Your policy proceeds may be taxable if you surrender your policy or allow it to lapse. If you have borrowed against your policy or taken withdrawals that exceed your contributions to the plan, and you allow the policy to lapse, the shortfall may be taxable. This outcome is possible even if you have had your account in force for many years. Should the financial markets suffer a bear market, it may be possible that the market value of your holdings will drop below the total amount of your contributions to the policy. The many fees charged on this type of policy will exaggerate that outcome. You must be aware of this factor before entering into a VUL policy.

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Should You Buy a Variable Universal Life Insurance Policy?

A variable universal life insurance policy will be completely unsuitable to the vast majority of consumers.

Not only is it not an optimal way to invest money, but it’s also a very expensive type of life insurance.

You will almost certainly be better served by taking a low-cost term life insurance policy and investing your money in index-based funds on your own.

Just about the only time a VUL policy will make sense will be if you have maxed out your traditional retirement contributions and want to save even more for your retirement.

However, even that strategy will not be the best use of your savings. The cost of a VUL—especially in the early years—can make it a poor investment vehicle.

Where to Get a Variable Universal Life Insurance Policy

Captive life insurance agents (those who work for a single insurance company) love to sell VUL policies. Our discussion of the very generous commissions paid to agents is the reason why.

It’s highly possible they’ll steer you into one of these plans, or something similar, even when there are other policy types that will serve your needs better and at a lower premium.

As independent insurance brokers, we work with many different life insurance companies offering the full range of life insurance products.

Our goal is to get you into the right life insurance policy for your needs and preferences and at the lowest premium costs. Except under very special circumstances, we won’t even recommend a complicated policy like a VUL.

That’s because, as independent life insurance brokers, we work for you and not for the insurance companies. Rest assured, you will pay nothing extra for our services, compared to the premium you might pay by making a direct application with the wrong life insurance company.