Unlike other types of universal life insurance, variable universal life insurance allows policyholders to invest the cash value of their policies in different accounts, like stocks, bonds, and commodities, similar to mutual funds. Policy owners can invest all the cash value in a single account, or invest the money in several different accounts to maximize their return on investment.
Like all life protection, consumers should weigh variable universal life insurance pros and cons before deciding the type of coverage that is right for their needs. After learning about the different types of policies and determining the best coverage for your family, compare rates with online life insurance quotes to find affordable companies and options.
Flexible Premiums – Pro
Unlike whole life insurance and level term life insurance, which have fixed premiums, variable universal protection has flexible premiums with a minimum and maximum payment. A portion of the premium pays for the life insurance and the balance is diverted to the investment accounts, building the policy’s cash value.
The more premium you pay, the faster the cash value and your investment grows. If the insured is unable to make a premium payment, universal policies allow the payment to be made by withdrawing the premium from the cash value, so the policy doesn’t lapse and stays in good standing.
Riskier Investment – Con
Unless the variable universal life policy has a minimum guaranteed rate of return, the insured person could lose his investment since the financial instruments used to generate income also have the potential for loss.
While most whole life coverage guarantees a reasonable, safe return, the guaranteed rate of return on variable whole life policies can be as little as 2%. Once the fees associated with the investment account are deducted, the insured person’s return on investment may be zero for the year.
However, with high risk comes the potential for high returns, and universal life insurance has the ability to produce outsized returns on good years. Applicants should weigh the pros and cons of fluctuations in their investments, and evaluate whether they have the financial ability and risk tolerance to withstand large swings in their account.
Tax Advantages – Pro
The returns earned on the cash value of life insurance are tax deferred until they are withdrawn. By using the cash value for no interest loans, the insured person can avoid paying taxes on returns indefinitely while he would have to pay up to 15% capital gains tax on returns on a regular investment account.
The only caveat in the deferred income tax is that if the loans ever equal the cash value amount, the policy lapses and all the income taxes come due in a lump sum, which could be substantial.
Costs – Con
Term life insurance is temporary protection with no cash value and it offers cheap premium rates, which are lower than those of variable universal life insurance or any other type of coverage. However, variable universal is more affordable than the other form of permanent coverage – whole life. For adults, parents, or seniors who simply need or want protection for financial dependents, term life insurance offers the lowest rates.
Keep in mind however, variable universal life combines an insurance policy with an investment vehicle and the price reflects the dual nature of the policy. If an applicant is looking for a way to build a nest egg for retirement or grow a financial asset, universal life may be the best coverage.
Cheap Life Insurance Quotes
Variable universal life insurance allows policyholders to maintain more control over their investments than other types of universal life insurance. VUL policies can be a useful tool in financial planning and the flexible premiums are an advantage to those whose income is seasonal or subject to fluctuations, allowing them to maintain a policy even when they can only make a minimum premium payment. Additionally, as with permanent coverage, universal life insurance does not lapse or need to be renewed regularly.
Consumers should consider all the risks and benefits associated with variable universal life insurance when considering the purchase. When making a financial decision, it is best to have all the information you need to make the right choice for your needs.
After evaluating pros and cons, consumers should consider getting free, instant life insurance quotes and comparing rates, coverage and companies to find the best option for their budget and future goals. Quotes can also help you make a decision on how much life insurance you need to buy or how much of a death benefit you can afford.