What it means
The name combines two features. Universal means the policyholder can vary the premium within limits and may be able to adjust the death benefit, while variable means the cash value is invested in sub-accounts that rise and fall with markets.
Each month, the insurer takes charges from the account for the cost of insurance, administration and other fees, and the remaining value stays invested. If markets do well, the account may grow enough to cover the charges for many years, and the policyholder may be able to reduce premiums.
If markets do badly, the account may not be enough to cover the monthly charges. The policy can then lapse unless the policyholder pays more, and a lapse can cause tax and a loss of cover at an inconvenient time.
Compared with plain variable life, which has fixed premiums, a VUL is more flexible, and compared with traditional universal life it carries investment risk instead of a declared interest rate. The flexibility is useful when income is irregular, such as for the owner of a small business.
Business owners sometimes use the policies for key-person cover or buy-sell funding, and high earners use them to build tax-advantaged savings after other retirement allowances are used. The tax rules differ by country and change, so local advice is essential.
Compared with a simple savings plan, the charges deserve close attention. They typically include a premium load, a monthly cost of insurance that rises with age, an administration fee and the annual fees of the chosen funds, and together they can take a meaningful slice of the account each year.
Advisers often suggest reviewing the account value every year, and using cheaper term cover if the main goal is simple protection.
In practice
Real-world examples.
Example
A self-employed consultant has uneven income and chooses a VUL so that she can pay larger premiums in good years and smaller ones in lean years. She picks a mix of share and bond sub-accounts. She monitors the account value each year and keeps a cash buffer so that a poor market year does not force her to raise premiums at a bad time.
Example
A 50-year-old executive buys a VUL to supplement his retirement savings and leave a benefit for his family. He plans to borrow from the policy later. His adviser warns him that large loans can cause the policy to lapse.
Example
A family business uses a VUL on the founder's life to fund a share buy-back from the estate. The company pays the premiums and reviews the account value annually. The finance director records the cash value as an asset and checks with the auditors on how changes in it should be shown in the accounts.
Formula
Calculation
Account value after a month = (Opening value + Premium paid - Monthly deductions) x (1 + Monthly investment return)
A policy has an account value of $30,000 at the start of the month. The policyholder pays a premium of $1,000, and the insurer deducts $150 for the cost of insurance and administration. The sub-accounts return 1% for the month. Account value = (30,000 + 1,000 - 150) x 1.01 = 30,850 x 1.01 = $31,158.50. If the return had been minus 1% instead, the value would be 30,850 x 0.99 = $30,541.50, which shows how the account can fall even while premiums are being paid.Case study
Seen in the real world.
This illustrative story is about a fictional customer, Hannah, who bought a variable universal life policy from a fictional insurer, Cresthaven Life. She paid $12,000 a year and invested mostly in shares, expecting the account to cover the policy charges in later years.
A prolonged market downturn reduced her account value from $140,000 to $95,000, and the monthly charges, which rise with age, began to eat into the balance. Her annual review showed that without higher premiums the policy might lapse in about twelve years.
Hannah decided to increase her premium to $15,000 and move some of the money into bonds. The fictional case shows why a VUL needs regular reviews and why the flexibility cuts both ways.
Watch out
Common mistakes.
- Paying only the minimum premium and assuming the policy is safe. A low premium and weak markets can leave the account unable to cover charges.
- Treating the policy as a pure investment. The insurance charges reduce the return, and cheaper ways to invest exist.
- Skipping the annual review. Charges and investment returns change, and the projections need to be updated.
Questions
People also ask.
What is the difference between variable life and variable universal life?
Variable life has fixed premiums, while variable universal life lets the policyholder vary the premium and adjust the death benefit within limits.
Can a VUL policy lapse?
Yes, if the account value is too low to cover the monthly charges and the policyholder does not pay more.
Is the death benefit guaranteed?
A minimum may be guaranteed if the policy stays in force, but the benefit and the account value can vary with the investment performance.
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