To develop more competitive financial products, the life insurance industry has created some very interesting and complicated insurances.
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 insurance can be adjusted, both at the time of the insurance and almost at any time thereafter.
In most respects, VUL insurance is a variation of the entire life insurance.
This is because it is a permanent insurance that offers both a death benefit and an investment provision. But that's pretty much where the similarities end.
The many flexibility in which possible universal life insurance makes it a significantly different life insurance product.
What is Variable Universal Life Insurance?
Variable universal life insurance is most similar to indexed universal life insurance (IUF), except that it involves significantly more risk
Like indexed universal life, VUL is primarily an investment fund that also offers a life insurance provision.
How does variable universal life insurance work?
You pay an annual premium, which is divided between administrative costs, agent commissions, life insurance coverage and accumulation of your cash value.
But unlike a full life insurance policy that provides a guaranteed annual return or an indexed universal life insurance policy to make it virtually impossible to lose money on investments in your cash value, VUL cash values are invested much more aggressively. And they have the risk of losing.
The cash value of your insurance will be invested in the insurance sub-account, which is basically the insurance industry's funds.
Unlike funds, however, the insurance's sub-accounts are not available to the public. These are own funds that are only available to the insurance company's customers.
The number of sub-accounts offered by insurance companies can vary, but you often have dozens of choices. In the same way as a fund family, there will be funds tied to different indices (such as the S&P 500) or highly specialized industrial sectors. You can choose a mix of several that meet your investment needs.
However, in a major deviation from indexed universal life insurance products, there is no ceiling on the amount you can earn on your sub-accounts with a VUL
But there is also no income floor to protect you if a fund falls in value. It has the potential to a) earn higher returns during years of stronger investment performance and b) experience potentially large losses during years when markets are developing poorly.
In another way, you can lose money in the investment part of your VUL policy. Neither the return on investment nor the invested capital is guaranteed in any way by the insurance company or any government agency.
Variable death benefit
One of the basic functions of a VUL policy is that the death benefit is fully adjustable. You can start with a death benefit of $ 300,000 and then lower it to $ 200,000 in five years and $ 1
This can be an important strategy if investment is the main purpose of taking out a VUL insurance policy, as it usually is.
Given that, there is something of a push-pull in a VUL policy. The greater the death benefit for your insurance, the greater the portion of your premium that goes toward that portion of the insurance. This means that less money will go into your cash value and investment provisions.
And since VUL insurance is usually based on an annual renewable term insurance policy, the annual cost of insurance coverage will increase each year as you age. In that case, you must either reduce the death benefit in your insurance 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 life insurance policies, VUL insurance policies come with a loan provision.
You can borrow at the cash value of your insurance, at a very low interest rate. In addition, the money you receive from the loan will generally not have any tax consequences.
One question that is worrying, however, is that the loan will ultimately be paid out of the death benefit for your insurance upon your death.
If the loan amount paid out by the insurance exceeds your net contributions to the plan, it will have tax consequences.
VUL Insurance Fees
If you are even considering a VUL insurance policy, you need to be thoroughly familiar with the many fees.
This is an important reason why we do not recommend this type of life insurance to most consumers.
VUL insurance is heavy on many fees, many of them large.
Fees you should expect with a VUL policy:
- Insurance agent commission. One of the reasons why insurance agents are so keen to sell a VUL insurance to you is that they get a very generous commission on the sale. This is usually based on a sliding scale, with the commission spread over several years. Unfortunately, the largest commission will be paid during the first year and decrease every year thereafter. It would not be uncommon for 50% of your first year premium to go to the insurance agent's commission. For example, if you pay a premium of $ 20,000, the insurance agent could possibly get half of it. This means that relatively little of your premium will go into the cash value, or even necessarily into the life insurance provision. It also has the possibility that your insurance will have a negative value after the first year. Due to the multi-year commission structure, it can take several years to build large cash value for investment purposes.
- Administrative expenses. As complex policies, VUL entails significant administrative fees. These are charged every year to manage the policy. It is possible that administrative fees can eat up from 5% to as much as 15% of your premium each year. Again, this means that less of your premium will go into the cash value.
- The cost of life insurance. At least a portion of your premium will cover the cost of your life insurance premium. As each year passes, the premium will be slightly higher, based on your age at the time of renewal. The life insurance costs will consume more of your premium the longer your insurance is in effect.
- Fund fees for sub-account. In the same way that funds add fees to insurance investments. Unfortunately, the annual account fees are higher than the typical listed fund and much higher than those charged to exchange traded funds. You can expect to pay annual fees on these accounts between 0.5% and up to 3%. If the annual fee on a fund is 2% and the fund earns 10%, you only get a net return of 8% on your investment.
The Benefits of VUL Insurance
- Flexibility. Unlike an entire 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 part of your premium that goes into your cash value.
- Investment regulations. A VUL insurance mainly functions as an insurance-sponsored investment account. It gives you many more investment options than you will find in a full life insurance policy. You will be able to fully participate in the profits from your investment accounts, which will enable you to earn real returns in the market.
- Investment income is tax deferred. The investment income in your account will be accumulated on a tax basis. This gives you the advantage of supplementing the entire return on investment throughout the insurance period. Investment income will only be taxed when it is withdrawn and then only to the extent that it exceeds the value of your contributions to the policy.
- Potential tax-free withdrawals. You can withdraw from your plan either by taking out a loan or by withdrawing amounts that you have contributed to the plan. Just like a Roth IRA, VUL allows you to withdraw the full amount of your contributions to the policy before any investment income is taken. This means that the amount of your withdrawals – up to the total amount of your plan grants – can be taken without tax consequences.
- Can be an excellent pension supplement. Virtually all retirement plans limit your contributions. For example, the maximum you can contribute is a 401 (k) $ 19,500 per year or $ 26,000 if you are 50 years or older. The maximum you can contribute to a traditional or Roth IRA is $ 6,000 per year, or $ 7,000 if you are 50 years or older. If you have reached these limits and want to contribute more to your pension – perhaps because you want to retire early – there is no limit to how much you can put into a VUL policy. It can be a valuable additional investment account to supplement what you have in your retirement plans.
Disadvantages of VUL Insurance
- You can make better investments on your own. Despite the impressive investment results and charts, an insurance agent will show you, the return on investment of a VUL policy is very likely to be less than what you can get if you invest on your own. If you simply invest your money in an exchange-traded fund based on the S&P 500 index, you will average 10% per year. Although you can get the same total return on your VUL sub-accounts, the investment fees will reduce the return on your investment. The difference of 1% or 2% per year can make a big difference over several decades.
- Premium payments to your VUL are not deductible. This generally applies to most types of life insurance. However, since a VUL is primarily an investment fund, the lack of tax deductions can be a problem, especially for anyone who does not usually maximize their formal pension plan contributions.
- High fees. We have spent a lot of time covering the many fees included in a VUL policy. These fees should not be taken lightly. Commission alone – taken mainly during the first years that your insurance is in force – will significantly reduce the cash value of your insurance. In the meantime, administrative fees, investment costs and an ever-increasing cost of your life insurance will further cover the value of your cash. If your withdrawals from your policy exceed the value of your contributions, you may incur a tax liability on the excess amount.
- Your insurance income may be taxable if you hand over your insurance or cancel it. If you have borrowed against your policy or taken withdrawals that exceed your contributions to the plan, and you cancel the policy, the deficit may be taxable. This is possible even if you have had your account in force for many years. If the financial markets are affected by a bear market, it may be possible that the market value of your holdings falls below the total amount of your contributions to the policy. The many fees charged for this type of insurance will exaggerate the result. You need to be aware of this factor before going into a VUL insurance policy.
Are you going to buy a variable universal life insurance?
A variable universal life insurance is completely unsuitable for most consumers.
Not only is it not an optimal way to invest money but it is also a very expensive type of life insurance.
You will almost certainly get better served by taking out low cost life insurance and investing your money in index-based funds on your own.
About the only time a VUL policy will make sense is if you have maximized your traditional pension contributions and want to save even more for your pension.
But 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.
Where to get a variable universal life insurance policy
Captured life insurance agents (those who work for a single insurance company) love to sell VUL insurance. Our discussion of the very generous assignments paid to agents is the reason.
It is very possible that they will 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 an independent insurance broker, we work with many different life insurance companies that offer the full range of life insurance products.
Our goal is to get you the right life insurance for your needs and preferences. and at the lowest premium costs. Except in very special circumstances, we do not even recommend a complicated insurance like a VUL.
This is because we as independent life insurance brokers work for you and not for the insurance companies. Rest assured, you will not pay anything extra for our services, compared to the premium you can pay by making a direct application to the wrong life insurance company. "current" information on this page, such as quotation estimates or relevant company information, may only be accurate from the last day of editing. Huntley Wealth & Insurance Services and its representatives do not provide legal or tax advice. Please contact your own legal or tax advisor.