VARIABLE UNIVERSAL LIFE or VUL!
What is variable universal life insurance?
Variable universal life insurance or VUL is a type of life insurance that accumulates cash value (cash surrender value.) A portion of the premium is invested in numerous sub-accounts that function like mutual funds. As such the risk and potential reward is much greater. The life “variable” component refers to the ability of the policy holder to invest into these mutual fund like sub-accounts. The investment risk can range from conservative (bond or money market funds) to aggressive (growth stock funds.) The “universal” component refers to the flexibility (of universal life insurance) the policy holder can make in premium payments and death benefit coverage. Your needs are constantly changing. That’s why you need a policy that can change to meet your needs.
HOW IS IT DIFFERENT THEN UNIVERSAL LIFE INSURANCE?
If you recall, universal life insurance is a type of permanent life insurance that earns tax-deferred cash value; just like variable universal insurance. The major difference is how that cash value is accumulated. Universal life policies earns interest on the premiums put into your policy “bucket” based upon the performance of the life insurance company. Simply put, the insurance company bears the risk. In variable life insurance the inherent risk is shifted to you because you are accountable for the performance of the sub-accounts.
HOW IS IT DIFFERENT FROM TERM LIFE INSURANCE AND PERMANENT LIFE INSURANCE?
A VUL policy differs from term life insurance in that term insurance is temporary insurance that earns NO cash value.
VUL differs from whole life insurance in that whole life has fixed premiums payments that generally cannot be missed without lapsing the policy while variable universal life insurance (VUL) has flexible premium payments. As long as there is sufficient funds to cover the insurance costs, the death benefit will be paid.
REASONS TO USE VARIABLE LIFE INSURANCE
- * Retirement planning-Because of its tax-free policy loan feature, the VUL policy can also be used as tax-advantaged income source in retirement, assuming retirement is not in the near future and the policy is not a modified endowment contract. Again, the policy must be properly funded for this strategy to work.
- * Financial Protection – VUL’s can be used to protect a family in the case of an untimely death. This option can be enticing for this need because it is a permanent policy that will pay a guaranteed death benefit. If a VUL is funded correctly, it will not lapse, unlike term life insurance. This may give the insured more insurance flexibility in future years.
- * Tax Advantages – Because of its tax-deferred feature, VUL’s may offer an inviting tax advantage, especially to those in higher tax brackets. If highly funded (still non-MEC), the tax advantages may counterbalance the cost of life insurance.
- * Estate Planning – Wealthy individuals with a large estate can often time use a VUL as part of their estate planning strategy to reduce or evade costly estate taxes by setting up a irrevocable life insurance trust (ILIT.)
- * Education Planning – The cash value accumulation of a Variable life insurance policy can be used to support children’s education, as long as the policy is started very early. Also, putting money into a VUL can be used to help children qualify for federal financial aid, since the federal government does not consider the cash value when calculating EFC (Expected family calculation.)
WHAT ARE THE RISKS OF A VUL POLICY?
- * Complexity – The VUL is one of the most complex products within the life insurance arsenal. It can easily be used (or sold) inappropriately because of the confusion. Proper funding, investing, and planning are usually required in order for the VUL to work as expected.
- * Cost of Insurance – The cost of insurance for VULs is generally based on term rates.
- * Capital Outlay – The cash needed to effectively utilize a VUL is generally much higher than other types of insurance policies. If a policy does not have adequate funding, it will likely lapse.
- * Investment Risk – Because the sub accounts in the VUL may be invested in stocks and bonds, which can be either conservative or aggressive the VUL policy holder now acquires the investment risk rather than the life insurance company.
VARIABLE UNIVERSAL LIFE INSURANCE (VUL) TO PROTECT YOUR BUSINESS
VUL policies can not only helps protect your family with life insurance, but protect a business as well. The potential investment growth of a VUL policy can make it a beneficial tool in business continuation, charitable giving, estate conservation and dependent care strategies. Additionally, it may be an effective funding vehicle for buy-sell agreements and split-dollar arrangements.
To find out more about VUL policies that have secondary guarantees in them or lifetime insurance coverage please visit the link.