Purchasing life insurance is very important decision. It is an instrument that will provide your loved ones with peace of mind if you are no longer around, as well as a tool for savings that will allow you to earn extra money. If you need insurance that will last your entire life, the best thing to do is to take out a permanent life insurance plan. But if you want a product that gives you more freedom, and is also very flexible, then a variable universal permanent life insurance plan is what you’re looking for. These policies are very attractive because they combine the best qualities of variable and universal policies.
In this article, you will learn about variable universal life insurance plans and how they work so that you can have more information in making your decision to purchase life insurance.
Variable Universal Life Insurance: Article Contents
What is Variable Universal Life Insurance?
If you are looking for life insurance , you are aware that you can choose between term life insurance, which has a specific duration, and permanent life insurance, which remains in effect for your entire life. Then, there are also various sub-types of each of these that can adjust to meet your needs. For example, if you are looking for a stable product, which will provide coverage without you having to worry about how it operates, then you can choose a whole or traditional life insurance policy. If you want the flexibility to increase and decrease monthly premiums and other amounts, you can choose a universal policy. Or, if what you are looking for is to make decisions and get the most return on your money, even if it means assuming some risk, then you can opt for a variable life insurance plan. But, if what you want is to combine the best qualities of all of these policies, then you might be interested in a variable universal permanent life insurance plan.
These types of universal and variable policies combine the features offered by universal and variable life insurance plans. From this union, a new type of policy emerges where, on one hand, you can invest your money in variable-income securities, and on the other, it offers flexibility that allows you to modify your payment conditions, final payout and other aspects of the policy. The result is an insurance policy that requires your intervention and decision-making, which means that it’s important for you to know exactly how it works.
Essentially, like all permanent life insurance plans, variable universal insurance provides you with coverage for life. It is designed to accompany you throughout your entire life, and when you pass away, you decide who will receive the payout, or death benefit.
This way, your variable universal policy provides a powerful savings component that you can use to invest in different products sold on the stock market. As such, their returns are subject to market fluctuations and are not always guaranteed. In addition, they also give you the possibility of modifying your premiums, reducing or increasing them as your needs change.
If you are interested in this type of variable universal policy, keep reading so that you can have a more thorough understanding of how they work.
How Does Variable Universal Life Insurance Work?
Variable universal life insurance is the most complex type of permanent insurance. This complexity is due to the amount of advantages and benefits it offers the policy-holder. That is why, if you want to purchase one, it’s important for you to know how they work, as well as they ways you can adapt and invest with variable universal insurance.
These types of permanent policies offer the same elements as the other permanent polices with a mixture of their characteristics. The two most attractive features are its death benefit and broad and diversified investment component.
The main features of these types of policies are:
- Underwriting. In general, you will have to go through an underwriting process to be granted these types of policies. For this, you will be required to provide evidence of your health condition and lifestyle habits. The younger you are, the easier it will be for you to get coverage from an insurance company, but it’s important for you to purchase the policy as soon as possible. Remember that the underwriting process is very important, making it paramount for you to be as honest as you can, providing truthful answers to all the questions the insurance company asks. You might have to undergo medical exams, including blood tests, x-rays and other tests. Don’t try to hide any information. This would be a serious mistake, because if the insurance company finds out the truth, they could cancel your policy.
- Premiums. Premiums are the fees you pay each month to keep your insurance in effect. In this aspect, premiums take on the characteristics of universal life insurance and are flexible and adaptable. This means that you can decide how much you pay at any time and increase the payments if you have more money, or lower them, or even suspend them, when you need money for other things. You can also adjust your premiums over time, either to invest more, or to protect yourself from specific issues.
This flexibility allows you a lot of leeway, and is an important advantage. Your premiums are used to fuel the investment component, which in reality, displace the insurance company’s risk onto the policy-holder, meaning you have to be paying attention, because as you postpone or reduce premiums, your death benefit also diminishes.
This happens because, in order to maintain the policy in force, the insurance company draws upon the cash value you’ve accumulated. This gives you time and flexibility, but remember that if you use up the cash value, your policy could lapse.
- Savings component. Just like universal and variable policies, variable universal plans are also tied to one or more investment accounts. These products take part of the money you pay as premiums and invests it in the stock market, meaning securities, investment funds, convertible bonds, foreign currency, real estate or other financial instruments. If these investments pay off, the money you earn will be added to your insurance policy in the form of increases in your death benefit and a higher cash value. But remember that free-market investments can go badly and have low profits, or even lose money. You might even be required to contribute extra money to maintain your policy in effect if the investments go badly. As such, it’s of the utmost importance that you pay attention to how your investments perform. To do this, it’s a good idea for you to have some knowledge about investments and be willing to assume the risk inherent in playing the stock market.
In exchange, taxes paid for the profits on the investments are differed, which allows you to have more money in the short term to improve the policy and investment.
- Death Benefit. The payout, or death benefit, is the money your beneficiaries will receive upon your death. You can decide how much each of them receives and you can also modify the list of people or entities that will receive the payout when you pass away.
It’s money that is tax-free, and there is a guaranteed minimum with this type of plan, but there is no maximum, meaning that the amount will increase in proportion to the return on your investments.
Consequently, variable universal policies have two types of death benefits: incremental and level.
Incremental means that the payout increases as the investment products provide a higher return. Upon your death, beneficiaries will receive the minimum agreed-upon payout, plus the profits from the variable-income investment.
On the other hand, with the level payout, the death benefit will not change, as it remains fixed. In this case, the profits from the investment are added to the policy’s cash value, and not the death benefit.
You can also reduce the death benefit if you prefer. One of the characteristics these policies take from variable insurance is that they allow you to decrease the amount of the death benefit if the insured thinks that they no longer need such a high payout. This happens frequently with people who have achieved a financially stable position and don’t feel that it’s necessary to leave a large amount of money to their heirs. In this case, they can lower the benefit, meaning their monthly premiums will go down.
- Beneficiaries.Like with all insurance policies, you should name beneficiaries who will collect the death benefit. It’s very important for you to carefully choose the beneficiaries of your life insurance, because later you can have problems if you don’t designate them clearly. Insurance companies allow you to name secondary, and even tertiary beneficiaries. This means that there are people who can replace the primary beneficiaries in their right to collect the benefit when if these pass away. You can also name a trust fund as beneficiary so that the money is managed according to your wishes. Or you can also name a charitable institution as beneficiary. An option that is generally advised against is to leave the death benefit as part of your inheritance. This is because legalization processes can cause significant delays in allowing access to the money.
- Cash Value. All permanent life insurance policies work in a very similar way: during the first years they are in effect, when you are young and your death risk is low, the premiums you pay are higher than the amount of risk assumed by the insurance company. This allows your premiums to remain accessible when you are older and your risk of mortality is very high. But, during these first years, you overpay. This accumulates funds that, in variable and variable universal plans, are also tied to stock market investments, meaning that this can change depending on market fluctuations. Regardless, once this money has reached a certain level, it must be handed over to the policy-holder, who can use it to reduce future premiums, or invest more money in their savings portfolio, as they see fit.
In addition, you can take out loans against the cash value. If you do this, remember that if you die without paying this amount, plus the fees incurred, they will be deducted from your death benefit.
As you can see, variable universal life insurance is a very versatile and flexible product that offers many options for you to use your money as you wish. It’s dual nature provides significant coverage on one hand, and on the other, a powerful investment option that allows you to play the stock market and choose the best options for your cash value. At the same time, it does have risks, which is something you should be very mindful of when making these decisions. This is why it’s important for you to know under what conditions variable universal insurance might be right for you.
Is Variable Universal Life Insurance Right for Me?
Purchasing an insurance policy that combines the best of universal and variable insurance is a good idea. But, as you’ve seen, you must do so with care, because it is a complex product that requires you pay attention and make decisions. Even so, its benefits include:
- Permanent Coverage. In contrast to term insurance, variable universal insurance is still permanent and provides coverage for your entire life. In addition, despite the risk inherent in the investments, there is always a guaranteed minimum death benefit.
- Flexibility. If you are looking for a product that adapts to you, and not one that forces you to adapt to it, this is the policy for you. You can modify the premiums, cash value and death benefit. When you want to pay less, you can. And if you want to add more, you can do that too.
- Investment. With the powerful variable-return investment tool, you can maximize the return on your money. This investment option gives you control that other policies don’t, but it also requires that you keep an eye on how the investments perform in order to make decisions to buy or sell. Remember that, in addition, your return is never guaranteed, and you can lose money. This means that there is an inherent risk you must assume, and you must be clear about the fact that you could lose money. As such, these policies require you to have the knowledge, attention and financial ability to absorb possible losses.
- Tax Advantages.Variable universal policies have several tax advantages. On one hand, taxes are differed on the money from the added value. On the other, the money from the payout will always be tax-free for beneficiaries. Only loans taken out against the added-value are subject to taxes, but at a very low rate.
- Guaranteed Death Benefit. Taking risks is interesting because it can earn you significant benefits, but the purpose of life insurance is to provide coverage to the people you choose upon your death. To ensure this happens, variable universal policies always guarantee that the death benefit for the policy-holder will be paid even if the investments associated with the policy have not performed well or have incurred losses.
- Potential Benefits. With these policies, by combining the death benefit and cash value with variable-return investments, there is a possibility of having significantly higher earnings compared to other products. Consequently, they have a higher risk.
Some of the main drawbacks or disadvantages include:
- Higher Price.Variable universal policies are more expensive. They are significantly more expensive than term insurance, for example. This is due to the variety of options and flexibility they offer, as well as their longer duration. The expenses inherent to this type of insurance can also be greater than other types, thereby increasing their cost. These include maintenance fees, administrative fees and other charges.
- Complexity. These types of policies are complex and require effort on your part. You have to keep an eye on how the investments evolve, study the market, and make decisions. This means that you need to monitor them.
- Cash Value is Not Guaranteed. If you don’t manage your insurance responsibly, you could accumulate very little, or even no, cash value. These polices don’t guarantee the generation of cash value because they use it to cover, for example, the premiums if you stop paying them. If you aren’t consistent in maintaining your policy, you could use up the added value.
- Risk of Loss. As we’ve mentioned, there is a real risk that you can lose money. The accounts and subaccounts the insurance company uses to channel investments are chosen for their good performance over time. Although this is no guarantee that they will always be stable, it can at least minimize the risk of losses. Another way to minimize risks is to diversify investments: the more broad an investment portfolio is, the more probable it is that the good performance of some will compensate for the shortcomings of others.
As you have seen, variable universal life insurance offers many opportunities to get the most value for your money. It also has risks, but if you are able to assume and manage them, you will have an insurance plan that is complete, flexible and profitable.
Regardless, you should always educate yourself and not make any decisions without consulting an expert. Ask your insurance agent to find out more. United States law mandates that insurance companies are required to provide you with detailed information about these products, as well as show projections and examples to clarify each part of the policy.
This article was updated on July 23, 2018.