Variable Universal Life Insurance: Market Role, Features, and Considerations
Variable universal life insurance (VUL) is a form of permanent life insurance that combines adjustable premiums and death benefits with a cash value component invested in various subaccounts similar to mutual funds. This investment-linked cash value can fluctuate based on market performance, presenting a potential for growth as well as risk of loss. VUL policies represent 14% of U.S. life insurance premium sales in 2024, reflecting their niche but notable role in the market.
VUL offers flexibility by allowing policyholders to adjust death benefits as insurance needs change, with premium payments being optional if sufficient cash value exists. The cash value can be used to pay premiums, borrowed against, or withdrawn, though building enough value for these options typically takes a decade or more. If cash value dips too low, increased premiums may be necessary to avoid policy lapse.
This insurance type requires active management since both the investment choices and policy costs directly impact cash value and long-term sustainability. The fees associated with VUL can be substantial, including sales, administrative, and underlying investment fund costs, along with surrender charges if the policy is cashed out early.
VUL suits buyers comfortable with moderate investment risk and seeking permanent coverage combined with investment growth potential. It may appeal particularly to those who have maximized retirement account contributions and desire additional tax-advantaged investment opportunities.
Alternative life insurance products include term life insurance with fixed-duration coverage and no cash value, whole life insurance with guaranteed premiums and cash value growth, traditional universal life with insurer-set interest growth on cash value, and indexed universal life whose cash value growth is linked to stock market indexes with downside protection.
Purchasing VUL requires licensed agents qualified in both securities and life insurance, and consumers are advised to carefully review policy illustrations and prospectuses. Due to potential commission-driven sales incentives, some industry experts recommend consultation with fee-based insurance advisors for unbiased guidance.
Consumers should evaluate insurer financial strength from ratings agencies such as AM Best, aiming for companies rated A- or better to ensure reliability. Understanding policy costs, investment risks, and long-term commitments is essential for informed decision-making.
Overall, VUL blends life insurance and market-based investment, offering significant flexibility but also necessitating diligent oversight to manage associated risks and optimize benefits. This product reflects an intersection of insurance and financial markets, underpinned by regulatory and compliance considerations pertinent to life insurance professionals and consumers focused on strategic financial planning.