Updated: January 2016
When you start shopping for life insurance, you quickly realize that you have a lot of options. You can choose a short-range "term" policy or a life-long "permanent" policy. And there are a multitude of choices within each of those categories.
Let's look at the typical options available in one type of permanent policy, called variable universal life, to help you determine if it's a fit for you.
Like all permanent policies, variable universal life combines investment features with a life-long death benefit — it's designed to stay in place as long as you live, as long as premiums are paid, says the Insurance Information Institute (III).
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 financial planning group Life Happens. This is a feature borrowed from universal life insurance, and it can 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. And while the reward can be great, you're also taking on risk that can reduce your cash value and, as a result, your death benefit if the investments don't perform, says the III. The upside? Transferring funds between investments is tax-free, so you're not constrained by the potential tax implications, says Life Happens.
You can increase the death benefit1. 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 it2. 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.
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 a life insurance agent, who can help you find the policy to suit your needs.