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Variable Universal Life Insurance

What it is and how it works
Guardian Life Insurance of America
Written by

Reviewed by

Variable universal life insurance

Variable universal life insurance (or VUL) offers permanent protection, flexible premiums, and a flexible death benefit. In addition, VUL lets you control how the cash value component is invested, and offers the potential for greater cash value growth via investments in stocks, bonds, and other securities.1 VUL can be a powerful, tax-efficient tool for building and protecting your finances. Read on to see how it works and determine if it's right for you.2

What are the key features of variable universal life?

  • Permanent protection: From day one, a lump-sum tax-free death benefit is payable to your beneficiaries. It's designed to last your entire life, but the benefit amount isn't guaranteed — it can fluctuate depending on investment performance and other factors.

  • Asset-building cash value: Part of each premium dollar goes to the cost of insurance and fees, and the other part goes into the policy's cash value, where it can grow tax-deferred. It's an asset that can be used for policy loans, to help supplement retirement income, or to fund other needs while you're alive.3

  • Market investment options: The cash value can be invested in grouped stocks and bond securities called "subaccounts." This investment provides additional growth potential compared to other policies, though it also comes with the added risk of investment loss if markets go down.

  • Adjustable premiums: Like other universal life policies, VUL gives you both the cash value and the flexibility to raise or lower premium payments as you see fit, within certain limits. However, paying minimum or insufficient premiums for a prolonged period could lead to higher premiums in later years to maintain coverage.

How does VUL compare to other types of permanent life insurance?

To decide whether variable universal life insurance may be a good choice for your needs, compare it to two other permanent life insurance options: whole life and indexed universal life.

Benefit

Whole Life

Indexed Universal Life

Variable Universal Life

Fixed death benefit

Yes

No

No

Access to cash value

Yes

Yes

Yes

Permanent protection

Yes

Yes

Yes

Highest potential cash value growth

No

No

Yes

Premium flexibility

No

Yes

Yes

Tax advantages

Yes

Yes

Yes

Investment risk

No

Yes

Yes

Variable universal life vs whole life

Both types of policies provide permanent coverage and a cash value component, but a whole life policy has more guarantees than VUL.4 The premium and death benefit of a whole life policy are guaranteed to remain the same for life, and the cash value grows at a guaranteed rate.5 Mutual companies (such as Guardian) may also provide dividends that can boost cash accumulation.6 Over time, however, the market-based subaccounts of a VUL policy can offer more potential for cash value growth as long as you are willing to tolerate the downside risk of investment losses.

Variable universal life vs indexed universal life (IUL)

Indexed universal life insurance policies tie account value to the performance of an index such as the S&P 500, with caps for minimum and maximum rates of return.8 So, for example, in a year where the index is up 20%, you may only see a 10% or 12% gain, depending on your rate cap. But if your chosen index is negative for the year, your cash value may stay the same or even grow slightly (depending on the policy's specific terms). Each insurance company has its own selection of indices available, and you may be able to choose more than one. You may also be able to allocate a portion of your funds to a fixed-rate interest option.

Indexed universal life insurance policies offer the premium flexibility of a standard universal policy with greater upside growth potential. But unlike a variable universal policy, your money isn't directly invested in outside securities, which helps life insurance companies minimize downside risk.

Who should consider variable universal life insurance?

A variable universal life insurance policy can be a powerful tool for building and protecting wealth, but it isn't right for everyone.

VUL is best for those who:

VUL is not ideal for those who:

Have high income

Prioritize low costs

Are looking for tax-advantaged growth

Are looking for simple coverage

Want flexible investment options

Want to avoid investment risk

Who could benefit from variable universal life insurance?

VUL could be a good fit for those seeking lifelong coverage and more investment control than other permanent life insurance offers. High-income individuals may choose this type of policy if they have “maxed out” other tax-advantaged vehicles such as retirement accounts. Because there are additional fees and investment risk associated with a variable universal life policy, it’s best suited for those who feel that the growth potential outweighs the risk and costs.

Who should avoid variable universal life insurance?

Variable universal life insurance policies often carry more fees than other types of life insurance. These fees can erode returns. Those who would prefer not to take on these fees or the risks associated with market investments may wish to consider other insurance options

Is variable universal life insurance right for you?

Ask yourself if you:

  • Want the potential for greater cash value growth

  • Can handle a higher level of risk

  • Are comfortable choosing and allocating investments

  • Want or need premium flexibility

  • Are willing to commit to periodic policy reviews to manage your investment subaccounts and premium payments

  • Are willing to invest the time to evaluate policy options and customize a strategy to meet your needs

If you answered yes to most of these questions, you may want to speak to a financial professional from a reputable insurer with proven claims-paying ability who can explain specific VUL options and help you decide which may be suitable for your goals.

How much does variable universal life insurance cost?

With a VUL policy, you'll pay fees toward the administration of the policy's life insurance and investment components. The portion of your premium invested in subaccounts is also subject to costs such as fund management fees and operating expenses. A VUL policy may have other fees as well, such as surrender fees or loan interest charges. The growth from positive market performance may be eroded by these fees.

Example

Let's look at a hypothetical example of a 35-year-old man in excellent health. He's looking for a $1 million policy and is intrigued by the flexibility of universal life insurance. He is also interested in the market participation features available with variable universal life, which could help him increase the cash value of his policy, so he selects a VUL policy.

Supposing a hypothetical annual premium of $8,000, various expenses must be deducted first; let’s say there is a 6% premium load ($480), including administrative costs and sales charges. That leaves a net $7,520 to be added to the policy’s cash value. After that, the insurance company may deduct various expenses, such as the cost of insurance (COI), on a monthly basis; at the end of the year, the cash value has dropped to $6,800 after fees and expenses. He allocates these cash value funds toward various investment options that are aligned with his goals and risk tolerance, gaining 7% ($476) over the year. Let's also imagine there is an average weighted subaccount expense ratio of 1.00% ($68) per year. His net gain is $408 on an investment of $6,800.

What are the pros and cons of variable universal life insurance?

The advantages of variable universal life include:

  • Flexible premiums

  • The potential for greater-than-average cash value growth (via market investments)

  • Increased control of the way your cash value is invested

  • Riders that allow you to customize your policy

  • Tax-deferred growth

  • The ability to access your cash value through withdrawals or loans

The potential disadvantages of variable universal life include:

  • Poor market performance may lead to a loss of principal

  • Policy fees may be higher than other types of life insurance

  • The policy may be subject to surrender charges for a set period

  • This is a complex form of life insurance that requires periodic review for best performance

Does Guardian offer variable universal life insurance?

Yes. Guardian offers the Flexible Solutions® VUL (2018), which provides three investment options:

  • Indexed Option: A portion of your investment is linked to the performance of the S&P 500.

  • Fixed-Rate Option: Earns a competitive current interest rate and a minimum interest rate of 1.50%.

  • Variable Investment Options: Choose from over 30 managed funds to customize your portfolio.

Next steps: Finding the right life insurance policy for you

Speak with a Guardian Financial Professional today to explore your VUL options, get insurance quotes, and receive personalized recommendations. You can also ask about other permanent life insurance options and term life.

Need some help?

Find a financial professional near you who can help

This article is for informational purposes only. Guardian may not offer all products discussed. Please consult a financial professional to understand what life insurance products are available for sale.

1 A Variable Universal Life (VUL) policy is considered both life insurance and a security and is sold with a prospectus. Premium and death benefit types are flexible. Its crediting rate is based on the performance of the underlying investment options provided in the policy. There is no guaranteed interest rate. This type of policy may lapse due to low or negative performance of the underlying investment options, inadequate funding, and increasing insurance costs. See your policy prospectus for more information.

2 Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.

3 Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses or is surrendered, any outstanding loans considered gains in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gains first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.

4 All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims-paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.

5 Some whole life polices do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial representative and refer to your individual whole life policy illustration for more information.

6 Dividends are not guaranteed. They are declared annually by Guardian’s Board of Directors.

7 A Universal Life Insurance (UL) policy provides a flexible premium, choice of death benefit options, and a guaranteed crediting rate (e.g., 2%). Policy growth is based on adequate funding, increasing crediting rates, and whether the costs of insurance are lower than expected. If any of these three factors are lower than expected (policy funding and crediting rates) and/or higher than anticipated (cost of insurance), the policy may lapse.

8 An Indexed Universal Life (IUL) policy is not considered a security. Premium and death benefit types are flexible. Its crediting rate is based on the performance of a stock index with a cap rate (e.g., 10%), a floor (e.g., 0%), and a participation rate (e.g., 100%). This type of universal life policy may lapse due to low or negative performance of the stock index, inadequate funding, and increasing cost of insurance rates.

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Frequently asked questions about variable universal life insurance

It's a type of permanent life insurance protection that provides investment options for building cash value. Policyholders can invest in subaccounts, which are market-based securities that can go up or down in value. Since cash value accumulation in these policies depends on the performance of your investment options, it is not guaranteed.

If the policy is a variable universal life policy (VUL), it also allows for premium flexibility: monthly payments can be raised or lowered within certain limits stated in the policy. However, paying the minimum for a prolonged period could result in a need to pay higher premiums in later years to maintain coverage.

Compared to other types of permanent life insurance, variable policies offer more potential for cash value growth because the cash value can be invested in market securities. However, since market growth can't be guaranteed, the account balance can and will decrease in value if the underlying investment options do poorly. This could impact your ability to borrow or withdraw funds when needed, affect death benefits, or, in some cases, cause coverage to lapse. So, a variable life policy isn't suitable for every individual or financial situation.

Yes. Variable Universal Life policies permit you to access the cash value of your policy through withdrawals or loans. These funds are generally income tax-free, provided they do not exceed your policy's basis.

A life insurance policy can be variable, universal, neither (like a whole life policy), or both (as is the case with variable universal life insurance). "Variable" refers to how the cash value grows. These policies let you invest in market securities with no growth guarantees, so cash value can vary depending on the ups and downs of your investment options and the market. "Universal" has to do with premium payment. A universal policy has variable premiums: it lets you raise and lower payments within a certain range defined in the policy contract. This helps make the benefits of a permanent life insurance policy more attainable for people with fluctuating incomes.