Variable universal life insurance: What it is and how it works

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Variable universal life insurance can be a powerful tool for building and protecting finances. Also known as VUL, it combines the life-long protection of a whole life policy, the premium flexibility of universal life insurance, and the investment options of a brokerage account with added tax benefits.1 VUL can be a valuable option for confident investors, but it's not for everyone: policies are complex and provide fewer guarantees than other types of life insurance.

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The four key features of a variable universal life policy

The four key features of a variable universal life policy
Permanent protection Asset-building cash value Market investment options Adjustable premiums
From day one, there's an income tax-free lump-sum death benefit 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. 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.2 It's an asset that can be borrowed against, used to help supplement retirement income, or fund other needs while you're alive.3 The cash value can be invested in grouped stock market and bond securities called "subaccounts.” This provides additional growth potential than other policies, along with the risk of investment loss if markets go down. Like other universal life policies, VUL gives you the flexibility to raise or lower premium payments as you see fit, within certain limits. But paying minimum insufficient premiums for a prolonged period could lead to higher premiums in later years to maintain coverage.

Comparing variable universal life to other types of life insurance

Vs. Term life insurance

Comparing variable universal life to term life insurance
Benefits Covered by term life insurance
Fixed death benefit Is covered
Access to cash value Not covered
Affordable coverage Is covered
Permanent protection Not covered
Potential investment growth Not covered
Premium flexibility Not covered
Tax advantages Is covered

Unlike VUL, term life insurance coverage only lasts for a limited time, typically between 10 and 30 years. It's considered a form of pure life insurance because there's no cash value component – it’s designed solely to give your beneficiaries an income tax-free payout if you die during the term. On the plus side, term coverage can be affordable and straightforward: you can get a large death benefit for a relatively small monthly premium, especially if you’re young.

Vs. Whole life insurance

Comparing variable universal life to whole life insurance
Benefits Covered by whole life insurance
Fixed death benefit Is covered
Access to cash value Is covered
Affordable coverage Not covered
Permanent protection Is covered
Potential investment growth Not covered
Premium flexibility Not covered
Tax advantages Is covered

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

Vs. Universal life insurance

Comparing variable universal life to universal life insurance
Benefits Covered by universal life insurance
Fixed death benefit Not covered
Access to cash value Is covered
Affordable coverage Not covered
Permanent protection Is covered
Potential investment growth Not covered
Premium flexibility Is covered
Tax advantages Is covered

A standard universal life policy provides permanent coverage and tax-advantaged cash value, along with the flexible premiums and death benefit of a VUL policy.5 However, there are no subaccount investments. Instead, cash value is guaranteed to grow at a minimum interest rate. While these policies don't earn dividends, values can grow faster than the guaranteed rate depending on the insurance company's investing performance. Even so, the market-based investments of a VUL policy can offer more cash growth potential, along with the downside risk of investment loss.

Life insurance policy features at-a-glance

Comparing variable universal life to other types of life insurance
Benefits Variable universal Term Whole Universal
Fixed death benefit Not covered Is covered Is covered Not covered
Access to cash value Is covered Not covered Is covered Is covered
Affordable coverage Not covered Is covered Not covered Not covered
Permanent protection Is covered Not covered Is covered Is covered
Potential investment growth Is covered Not covered Not covered Not covered
Premium flexibility Is covered Not covered Not covered Is covered
Tax advantages Is covered Is covered Is covered Is covered

For market growth potential with limited downside risk, consider an indexed universal life policy.

Indexed policies are similar to variable policies, but they accumulate cash value somewhat differently: indexed 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.6 So, for example, in a year where the index is up 20%, you may only see a 10%-12% gain. Conversely, if your chosen index is negative for the year, your cash value will stay the same or even grow slightly (depending on the specific terms of the policy). 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 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 to minimize downside risk.

Variable life insurance is not the same as variable universal life insurance.

It's easy to confuse the two: they both provide permanent protection with market-based growth potential. These policies are considered "variable" because investments and cash account balances are not guaranteed – they can and do vary based on market performance. The main difference has to do with premium flexibility:

  • Variable life insurance policies do not offer premium flexibility 
  • Variable universal policies let you raise and lower premiums within a certain range 

In both these life insurance products, the policy's death benefit can fluctuate depending on the performance of the underlying investment portfolio and the amount of money in the cash account, among other factors.

Is variable universal life insurance right for you?

This type of policy can be a powerful tool for building and protecting family wealth, but it is an inherently complex financial product that isn't for everyone. However, it could be right for your financial future. Ask yourself:

  • Do you want greater potential for cash value growth – along with a higher level of risk?
  • Are you comfortable choosing and allocating investments?
  • Do you want (or need) premium flexibility?
  • Are you willing to commit to an annual (or more frequent) policy review to manage your investment subaccounts and premium payments?
  • Are you willing to invest the time to evaluate policy options and customize a strategy to your needs? 

If you answered yes to most of the above questions, then it may be time to talk to a professional about specific variable universal life insurance coverage options. Review various "What if" scenarios with your financial professional, for example, to understand what happens to the death benefit if your investment strategy is off, or how to make the most of tax-advantaged cash value growth when your investments are up. But make sure you have a financial professional who understands VUL and will take the time to learn about your financial obligations, investment objectives, and risk tolerance. How do you find such an experienced professional? Ask a friend or colleague for a recommendation. Or, we can put you in touch with a local Guardian financial representative who will help you explore the options and compare policy quotes.

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Frequently asked questions about variable universal life insurance

What is a variable life insurance policy?

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. So, cash value accumulation in these policies is not guaranteed.

If the policy is a variable universal life policy, 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.

What are the risks of variable life insurance?

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 investments do poorly. This could impact your ability to borrow or withdraw funds when needed or, in some cases, cause coverage to lapse. So a variable life policy isn't right for every individual or financial situation.

What is the difference between universal and variable life insurance?

A life insurance policy can be variable, universal, or both (as is the case with variable universal life insurance). "Variable" refers to cash value accumulation. These policies let you invest in market securities with no growth guarantees, so cash value can vary depending on the ups and downs of 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.

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Disclaimer

This article is for informational purposes only. Guardian may not offer all products discussed. Please consult with 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. It’s 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 cost of insurance rates. See your policy prospectus for more information.

2 Some  life insurance polices do not have cash values in the early years of the policy. Talk to your financial representative and refer to your individual whole life policy illustration for more information.

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

5 Universal Life Insurance may lapse prematurely due to inadequate funding (low or no premium), increase in cost of insurance rates as the insured grows older, and a low interest crediting rate. This does not apply to universal life policies which have a secondary guarantee, but if the secondary guarantee requirements are not met the policy will most likely lapse.

6 An Indexed Universal Life (IUL) policy is not considered a security. Premium and death benefit types are flexible. It’s crediting rate is based on the performance of a stock index with a cap rate (i.e. 10%), a floor (i.e. 0%), and a participation rate (i.e., 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.

2022-138364 20240531