What is variable universal life insurance?

Last updated: January 2022

Variable universal life is a type of permanent life insurance policy. With features that include cash value, investment variety, flexible premiums and a flexible death benefit.

Like most permanent policies, variable universal life insurance (VUL) offers life-long protection — it's designed to stay in place as long as you live and, sufficient premiums are paid.

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What are the key features of variable universal life insurance?

The main features of a variable universal life policy are a mix of those typically found in variable life and universal life policies:

Your premiums are adjustable.

You have the ability to skip a payment or even stop paying your premium if the cash value of your policy can cover the costs, says the nonprofit group Life Happens. This is a feature borrowed from universal life insurance, and it may be helpful if an emergency leaves you short of cash.

You have investment variety and risk.

As with a variable life policy, variable universal life lets you invest in underlying sub-accounts offering a variety of investment options. These investments are tied to financial markets, and the value of your policy may fluctuate as the value of your chosen investments go up or down. While the reward can be great, you're also taking on risk that can reduce your cash value and, if by policy provisions the policy lapses, your death benefit could be lost as well, says the Insurance Information Institute (III). The upside? Transferring funds between investments is tax-free, so you're not constrained by the potential tax implications, says Life Happens.

With VUL policies, you choose from a number of investment options for your policy's sub-accounts. Life Happens states that you can typically invest in stocks, bonds or a combination of the two. You can also opt to invest in a fixed account, which provides a guaranteed minimum interest. The value of your policy's sub-accounts fluctuate based on how these investments perform. If they do well, your policy's value increases. If the investments decrease, though, your cash value will decrease as well.

You can increase the death benefit.¹

If your insurance needs change over time, you can increase or decrease your coverage, says Life Happens. For instance, you may be able to request a death benefit increase or make a lump-sum payment to boost the policy's cash value (though the IRS has limitations on how big that one-time payment can be), the group says.

You can withdraw or borrow from it.²

Like some other permanent life insurance options, a variable universal life policy allows you to withdraw funds or take out a loan against the cash value. The downside is that a withdrawal or a loan can reduce your death benefit, or result in a tax liability if you don't follow guidelines on repayment.

How is variable universal life insurance different from universal life insurance?

One main difference between variable universal life and universal life insurance policies is that VULs offer more investment options. You can select a number of different funds to essentially create a portfolio. Universal life policies do not offer this investment option, but you can select a policy with features that suit your needs, such as a fixed interest rate or one that fluctuates with the stock market.

Who might be a candidate for variable universal life?

Wondering if variable universal life insurance is right for you? Life Happens says it's a good option for people "seeking maximum flexibility," which also means you'll want to be sure you can monitor investment performance and make decisions about where to allocate funds over time. It's important to understand that investing involves risks that have the potential to reduce the policy's cash value.

Of course, any decision about life insurance takes a bit of thought. That's why it can be helpful to review your current circumstances and goals with your insurance provider, who can help you find the policy to suit your needs.