What is Variable Universal Life Insurance? Understanding VUL

• Variable universal life insurance (VUL) offers permanent coverage with the flexibility to adjust premiums, death benefits, and investment choices.
• The cash value can be directed into sub-accounts tied to the market, giving policyholders access to growth potential along with exposure to investment risk.
• Fees and policy costs can be substantial, so it's generally best suited for those comfortable managing investments over the long term.
• A variable universal life policy often appeals to high earners or experienced investors who want to combine lifelong protection with an additional tool for wealth building.

At its core, variable universal life insurance combines lifelong protection with flexibility and investment choices. A portion of your premium covers the death benefit, while the remainder funds a cash value account. Unlike fixed or indexed products, variable life insurance lets you direct that cash value into sub-accounts tied to the market, giving you higher growth potential but also more exposure to risk.

What Are the Key Features of Variable Universal Life Policies?

• Cash value growth tied to investments: You can allocate cash value into sub-accounts that behave like mutual funds, offering the chance for higher returns, but also the possibility of losses, including the loss of principal.
• Flexible premiums: Payments aren’t locked in. You can increase or decrease contributions as long as there’s enough cash value to cover policy costs.
• Adjustable death benefit: Many VUL policies allow you to raise or lower your coverage amount, depending on your financial goals and life stage.

A variable universal life insurance policy has two main components: the death benefit and the cash value account. Premiums first cover insurance costs and any fees or charges, and the remainder goes into cash value, which you can invest in sub-accounts tied to the market. The policy’s flexibility lets you adjust premiums and death benefits over time, but the investment side means your account value will rise and fall with market performance.

Read: Common Exclusions in a Life Insurance Policy

Example: How VUL Works

Maya is 45 years old, married with 3 kids. She is an attorney, and her husband Scott is an engineer. They have a high household income, and they have both maxed out their 401(k)s at work. Maya and Scott have term policies to cover the mortgage and future college tuition for their children, but they want lifelong protection for their family and are looking for another tax-advantaged way to save money.

Maya purchases a VUL policy, and her monthly premiums are $600. Roughly half of each payment covers the cost of insurance, while the other half ($300, or $3,600 a year) is directed into her cash value account. She chooses to split the investments across different sub-accounts: 70% in a stock fund and 30% in a bond fund.

Here’s a hypothetical example of how this could work over the first three policy years:

This simplified illustration shows how a VUL policy’s cash value can fluctuate with the market. Over time, strong years can build savings, but down years can reduce account value. Policy fees and insurance charges apply each year, so the net growth may be lower than market returns.

How VUL Returns Differ from IUL Returns

One of the biggest distinctions between VUL and IUL is how the cash value responds to market changes. In an IUL policy, growth is tied to an index, but not directly invested in the market. This means returns are protected by a floor in down years and capped in strong years.

With VUL, there are no such limits. Your account value can rise sharply in good markets, but it can also decline when investments lose money. This direct exposure makes VUL riskier, but also potentially more rewarding, than indexed universal life.

*For example, if Maya had purchased an indexed universal life (IUL) policy instead of a variable policy, her account would have played out differently.*

In Year 2, when the stock market dropped, her cash value wouldn’t have lost money thanks to the policy’s 0% floor. But in Year 3, when the market surged, her return would have been limited by the policy’s cap, perhaps credited at 10% instead of the full 16% she saw with VUL.

The trade-off is clear: IUL cushions losses but trims big gains, while VUL fully reflects the market’s highs and lows.

Read: How to Avoid Taxes on Life Insurance Proceeds

Like other forms of permanent life insurance, a VUL policy provides a death benefit that pays out to your beneficiaries when you die. This protection is the foundation of the policy, ensuring your loved ones have financial security. At the same time, you can build cash value through underlying investment options, giving you an additional resource while you’re still living.

VUL May Work Best For:

• High-income earners: People who have already maxed out retirement accounts and want another tax-advantaged way to grow assets.
• Experienced investors: Those who are comfortable managing market risk and want flexibility in their life insurance strategy.
• Hands-on policyholders: Individuals who are comfortable with a more “active” approach and willing to monitor their policy and investment choices regularly.
• Long-term planners: Families who value permanent coverage and are prepared to monitor a policy for decades.

VUL May Not Be a Good Option For Those Who:

• Prefer predictability: If you want steady, guaranteed growth, VUL’s market risk can feel too volatile.
• Need low-cost coverage: Term life usually provides more affordable protection without the added investment risk.
• Don’t want active involvement: VUL requires monitoring of sub-accounts and adjustments over time, making it less suitable for a hands-off approach.

The cost of a variable universal life insurance policy may vary widely, since premiums are flexible and depend on factors like age, health, coverage amount, and how the policy is structured. While you can adjust payments over time, it’s important to understand that insurance charges and investment risk both affect long-term performance. 

For high earners, VUL can be a useful tool, but only if you’re prepared to fund it consistently and manage it actively.

Compared to other policies, VUL is more expensive than term life and often sits on the higher end of the permanent coverage spectrum. Whole life is typically the costliest option because of its guarantees, while VUL can be pricier than fixed or indexed universal life depending on how it’s designed.

Does Variable Universal Life Insurance Have Tax Advantages? 

Yes. Like other forms of permanent coverage, VUL offers tax-deferred cash value growth, meaning you don’t pay taxes on earnings each year. Policy loans can often be taken tax-free as long as the policy stays in force, while withdrawals may reduce the death benefit and could be taxable if they exceed your cost basis (the amount you paid in). These tax benefits make VUL attractive for people who have already maximized traditional retirement accounts and are looking for another way to build long-term value.

Like any sophisticated financial product, VUL comes with both strengths and trade-offs. Understanding these can help you decide whether the flexibility and investment potential are worth the added complexity and cost.

Benefits of Variable Universal Life Insurance

• Lifelong coverage: As long as premiums are paid, your beneficiaries are guaranteed a death benefit.
• Growth potential: Cash value can grow significantly through sub-account investments, especially in strong markets.
• Flexibility: Adjustable premiums and death benefits let you tailor the policy as your needs change.
• Tax advantages: Cash value growth is tax-deferred, and policy loans may be tax-free if structured properly.
• Control: You choose how cash value is allocated among different sub-accounts, allowing for a customized portfolio.

Potential Drawbacks of Variable Universal Life Insurance

• Market risk: Unlike IUL, there’s no floor. Your account can lose value when investments decline.
• Complexity: VUL policies require active management and aren’t easy to understand at first glance.
• Higher costs: Insurance charges, fund management fees, and policy expenses can reduce returns.
• Risk of lapse: Underfunding or poor performance may cause the policy to lapse without careful monitoring.
• Not ideal short term: The benefits of VUL build slowly, so it’s best suited for long-range plans.

Read: How Does Private Placement Life Insurance Work?

Variable universal life insurance sits in the same family as other permanent insurance products, but its investment component sets it apart. Comparing VUL to term, whole, and indexed universal life highlights how it stacks up in terms of cost, guarantees, and growth potential.

Variable Universal Life Insurance vs. Term Life

Term life is the simplest and least expensive option – it covers you for a set number of years and doesn’t have a savings component. VUL, on the other hand, provides lifelong coverage and a cash value account with investment options, but it comes with higher costs and market risk.

Variable Universal Life Insurance vs. Whole Life

Whole life offers permanent coverage with guaranteed growth and predictable premiums. It’s designed for people who value stability and certainty. VUL trades those guarantees for more flexibility and the chance for higher returns, but policyholders must accept investment risk and higher complexity.

Variable Universal Life Insurance vs. Indexed Universal Life

Indexed universal life ties cash value growth to an index with built-in caps and floors, but your money isn’t directly invested in the stock market. That means you’re protected in down years, but somewhat limited in strong years. 

VUL has no such guardrails. Your account can capture full market gains but also suffer losses, so it requires more hands-on management and a higher tolerance for volatility than IUL.

Strictly speaking, variable universal life insurance is first and foremost an insurance policy, not an investment account. But its cash value component functions much like one, since you can allocate money into market-based sub-accounts. For investors who already max out retirement accounts and want another tax-advantaged place to grow assets, VUL can be a useful complement to your financial portfolio.

The catch is that performance isn’t guaranteed, and fees are higher than what you’d pay in a standalone brokerage account. That means VUL may appeal to high earners with long time horizons and a tolerance for risk, but it isn’t the right choice if you’re looking for simple, low-cost growth.

Read: What Does Life Insurance Not Cover?

Even experienced investors can mismanage a VUL if they overlook how the policy works. Here are some of the most frequent pitfalls:

• Underfunding the policy: Skipping too many payments or reducing payments too much can cause the cash value to deplete and the policy to lapse.
• Ignoring fees: Management fees and insurance charges can impact returns, so read your policy carefully and be aware of fees and charges.
• Chasing performance: Moving money between sub-accounts too often can increase risk and reduce long-term growth.
• Expecting guaranteed results: Unlike whole life or IUL, VUL offers no floors or caps. Results depend on actual market performance.
• Neglecting reviews: A VUL requires ongoing monitoring to make sure premiums, investments, and policy goals remain in balance.

A variable universal life policy can be powerful in the right hands, but it isn’t the only option for blending protection and savings. Depending on your goals, you may want to look at:

• Whole life insurance: Permanent coverage with guaranteed growth and predictable premiums, though it’s usually the most expensive option.
• Indexed universal life (IUL): Ties cash value growth to a market index with caps and floors, offering some upside potential with more protection against losses.
• Fixed universal life: Provides steady interest crediting with growth that’s typically more limited over time.

Variable universal life insurance is a type of permanent life insurance that provides lifelong coverage with flexibility, and is designed for people who are comfortable managing investments inside their insurance. It offers the potential for cash value growth but comes with higher costs, market risk, and the need for hands-on involvement.