Here, we're looking at the basics of a variable universal life VUL insurance policy that includes what it is, how it works, and a few of the pros and cons. Variable universal life insurance is a permanent life insurance policy that allows for growth. The cash value of a variable universal policy can be invested to grow the value of the account.
The dual nature of VUL provides you with valuable life insurance coverage, along with a cash-value component that permits you a certain degree of control over where you want to allocate the cash-value portion of your policy for greater earning potential along with the market risk that comes along with it.
Before investing in a VUL policy, it's important to assess if this is the best type of life insurance for you. Because VUL involves market investments, there is some market risk. Those who are risk averse may wish to investigate other life insurance options. However, for those who are comfortable proactively managing their investments, VUL may be a good option.
VUL may benefit those who can contribute to the policy early in the policy's life, providing greater opportunity for growth.
By withdrawing a portion of your policy, you can keep some level of life insurance in place while walking away with a portion of your accumulated cash value.
This can also be helpful from a tax perspective. Surrender your entire policy. In this case, you can withdraw all the accumulated cash value in your policy, but you also surrender all your life insurance. If your cash value is worth more than the basis that you paid in, you will owe ordinary income tax on that amount. When researching life insurance, you may come across types of insurance called variable life insurance and universal life insurance.
It could be natural to wonder if variable universal is the same as the other two. Variable universal life actually combines the other two. Variable refers to the aspect of the insurance that gives you more flexibility with how your cash value is allocated. Universal refers to the flexibility with premium payments and death benefit. During an annual review with your advisor. One of the great benefits of variable universal life insurance is its flexibility.
When you experience changes in your personal situation. A common time to review variable universal life insurance policies is when you get closer to retirement.
It is natural that as you age, you want to be more conservative with the dollars you have spent a lifetime accumulating. As with all investments in the stock market, your cash value can fluctuate. Your investment could make good gains, but losses are also possible.
Some of the benefits of variable universal life insurance include:. Your life insurance policy will have two components: the death benefit and the cash value. The death benefit that will be paid out to your beneficiaries when you pass is separate from the cash value and is guaranteed as long as you continue to pay your premiums.
Most life insurance policies have a set monthly premium. You can pay the minimum to keep the death benefit current. You can choose how often you pay your premiums monthly, quarterly or annually. In other permanent life insurance policies, the amount that goes towards the cash value earns a small amount of interest.
You can invest the cash into a mutual fund or specific stocks for greater growth. The amount your beneficiaries receive after you die will be exempt from federal income taxes. Any income you earn from the invested cash value is only subject to federal tax at the time you withdraw funds. Keep in mind that if your policy lapses or is terminated with outstanding policy loans, you may be subject to federal taxes on the outstanding amount. Term life insurance is a temporary life insurance solution.
Permanent life insurance is not temporary like term life insurance. As long as you continue to pay your premiums, your permanent life insurance policy is in effect. Permanent life insurance has two parts: the death benefit and the cash value portion. The death benefit is reserved as a payout to your beneficiaries after you pass away. In contrast, you can withdraw and borrow from the cash value portion throughout the life of the policy.
Both are permanent life insurance. Whole life insurance has set premiums for life and the cash value portion earns a small amount of interest.
Variable universal insurance policy premiums are flexible and can be adjusted. The cons of variable universal life insurance include complexity, higher cash needs, long time horizons and market risks. VUL policies are more complicated than term and whole life policies.
Before buying, be sure to clearly understand the goals you're trying to achieve. Know how this product will support them. Consider talking with a financial professional or tax advisor about the details. Also read and consider prospectuses before investing.
Required funding contributions can be higher for VUL than for other types of life insurance. VULs generally have higher contract charges, usually include investment fees and may require more funding to withstand market downturns. To make the most of your financial contributions, consider consulting with a financial professional. VUL contracts are designed to meet long-term financial goals.
If you invest the cash value of your life insurance in investment subaccounts, that cash value will be subject to market cycles and investment risks. If your investments perform poorly, you could lose your gains and initial investment.
A jam-packed feature list sets variable universal life insurance apart. It has one of the widest ranges of choices available among life insurance products. The extras contribute to the higher cost of this policy. VUL insurance usually costs more than term or whole life. There are other notable differences between VUL and its peer life insurance policies as well. Term life insurance is generally the most common life insurance option.
It provides a basic death benefit and coverage for a set number of years. Differences between VUL and term life insurance include:.
Whole life insurance is another common type of life insurance after term insurance. Whole life provides a basic death benefit, plus cash value. Universal life insurance is similar to VUL. The main difference is that universal life generally lacks a self-directed investment component.
It accumulates cash value through credited rates set by the insurer. Variable life insurance is also closely related to VUL.
The main difference between VUL and variable life is that variable life has less premium payment flexibility. With variable life, contributions are made at a set rate, on a set schedule. With both variable policy types, you make investments through your life insurance.
Those investments are governed by U. Explore your options or get a free life insurance quote by giving us a call at or getting in touch with the info below.
To learn more about the privacy of your information, visit our privacy policy. Whether variable universal life insurance is a good choice depends on your financial goals, risk tolerance, time horizon and strategy.
If you have a high-risk tolerance and the idea of a death benefit is appealing, a VUL policy might be a good option for you. First and foremost, VUL is life insurance. It provides your loved ones with money when you die, as long as your contract retains value. You may be able to wait to pay taxes on growth until you withdraw money from the account later on. As you weigh your decision, consider the risks of VUL in addition to the benefits.
If the VUL investment options you selected perform poorly, you could lose your gains. Like all life insurance, VUL contracts include charges to cover insurance and the cost of doing business. A variable universal life insurance policy can expire if you do not provide enough funding to keep the contract from lapsing without value. Remember that the cash value of a VUL policy is allocated to the investment options you select.
That means if the market performs poorly, your policy could lose all its value. Most variable universal life insurance policies offer flexible premium payments.
Your premium payments contribute to your death benefit, build cash value and pay operational costs. The premium flexibility for variable universal policies usually come down to two things: flexibility in when you pay and how much you pay.
Some VUL policies allow you to change the dates that your life insurance premium is due. There will be limits on the timing that is allowed.
You may have the option to set up regular payments or pay whenever you choose. Flexible premiums also allow you to change the dollar amount due in a premium bill within limits. You may be able to pay a lower insurance premium in October, so you have more money to use for the car purchase.
Then, next month, you would pay a higher premium to compensate. There would be no penalty for doing so, because the two payment amounts are equal to the total amount you owed in life insurance premiums for that period.
Charges to cover the costs of providing your life insurance including mortality costs and contract fees come out of your premium payment first. Then, the remaining premium payment goes toward building the policy's cash value. The cash value of VUL insurance can usually be directed to one of two places: a variable subaccount or a fixed subaccount.
Variable subaccounts consist of investment options. Fixed accounts have a set fixed interest rate. Allocate funds in the accounts that best fit your risk tolerance.
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