Variable Universal Life Insurance

What is Variable Universal Life Insurance (VUL)?

Variable universal life insurance is a type of permanent life insurance that 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.

How Does Variable Universal Life Insurance Work?

A variable universal life insurance policy has two main components: the death benefit and the cash value account. This is how it works:

• You pay monthly or annual premiums to keep your VUL active. 
• Premiums paid first cover insurance costs and any fees or charges, and the remainder goes into cash value.
• The tax value growth is tax-deferred and invested in sub-accounts tied to the market, meaning  your account value will rise and fall with market performance.
• The policy offers you the flexibility to adjust premiums and death benefits over time.

Death Benefit Structure

Like other life insurance, VUL pays a death benefit to your beneficiaries when you die. The amount can be level or increase as cash value increases, depending on how the policy is set up. This impacts not just the life insurance payout but also the cost of your premiums. A level death benefit keeps the payout fixed at an affordable cost.  An increasing benefit, on the other hand, offers the policy’s face value plus the accumulated cash value, at a higher policy cost. This flexibility allows you to align the death benefit with your family’s evolving financial needs.

Cash Value and Investment Sub-Accounts

The cash value in a VUL policy is tied to market-based sub-accounts that behave like mutual funds, offering the chance for higher returns but also the possibility of losses, including the loss of principal. If the performance is poor, the cash value can reduce as it’s used to cover the cost of life insurance. A depleting cash value may impact the policy’s sustainability. 

Premium Flexibility Explained

Like other universal life insurance policies, premium payments aren’t locked in for the VUL policy.  You can increase or decrease contributions as long as there’s enough cash value to cover policy costs. If cash value is insufficient to cover policy costs, underfunding, especially when the performance is bad, may lead to policy lapse.

Example: How a Variable Universal Life Policy 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.

Read: Accidental Death and Dismemberment Insurance

How VUL Returns Differ From Indexed Universal Life (IUL)

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.

Variable Universal Life Insurance vs Other Life Insurance Types

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 vs Term Life Insurance

Term life insurance 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 vs Whole Life Insurance

Whole life insurance 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 vs Indexed Universal Life Insurance

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.

Quick Comparison: VUL vs Other Life Insurance Types

Read: Final Expense Life Insurance for Seniors

Pros and Cons of Variable Universal Life Insurance

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.

Advantages of VUL

• 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.

Disadvantages of VUL

• 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 for short term: The benefits of VUL build slowly, so it’s best suited for long-range plans.

How Much Do Variable Life Insurance Policies Cost?

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.

Sample Premium Ranges by Age

Here are estimated monthly premium rates for a variable universal life insurance with a coverage amount of $250,000¹

Is a VUL Policy a Good Investment?

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.

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.

Read: What Is an Irrevocable Life Insurance Trust (ILIT)?

Common VUL Mistakes

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.

Who Should Consider Variable Universal Life Insurance?

Like other forms of permanent life insurance, a VUL policy provides a death benefit that pays out to your beneficiaries when you die. So, it may be a good fit if you’ve dependents to look after and you want financial security for them. You can also build cash value through underlying investment options, giving you an additional resource while you’re still living. Through such features, it may be subjectively suitable for different people, as detailed below:

VUL May Be a Good Fit 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.

Alternatives to Variable Universal Life Insurance

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.