Should You Get Variable Universal Life Insurance?

Life insurance comes in many forms. And they can be difficult to understand, so it can be a challenge to figure out which kind is best for you. Variable universal life insurance is just one of several forms you may be considering.

To help you decide if it’s right for you and your circumstances, here’s what you should know about how it works, how it differs from the the very similarly named universal life insurance and how to decide if it’s right for you.

Variable universal life insurance is a policy that lasts your lifetime, as long as you pay the premium.[1] It has an adjustable death benefit and flexible investment options, with part of your premium set aside (known as cash value) to be invested based on a variety of options offered by the company.

Those options can include equity, bond and money market portfolios, and the growth in those investments is tax-deferred. Another benefit is that you can use the cash value for personal use like buying a home through withdrawal or a loan.[2]

“Due to their investment nature, [variable] insurance products are considered securities,” says David Pierce, assistant professor of insurance at the American College of Financial Services. A “security” is an investment, such as stocks and bonds. If an investment is made in a business with the expectation of a profit, it is considered a security.[3]

“The representative of the insurance company must be registered and licensed to sell security products and must provide prospective clients or buyers with a prospectus before or at the time of sale,” Pierce says.

While some policies have fixed premiums—the amount you pay never changes—variable universal life insurance does not. That can be useful if you end up needing to reduce your spending at some point in the future. There is also flexibility in terms of the death benefit, notes Pierce.

Variable universal life insurance and universal life insurance are not the same thing, despite the nomenclature. Here’s the main difference:

• Variable universal life insurance: Your cash value is placed in an investment portfolio that fluctuates with the performance of the markets.

• Universal life insurance: Your cash value grows at a rate set by your insurer, generally in line with current money market rates.[4]

While most universal life insurance policies guarantee you certain returns, variable universal life insurance policies do not. That puts you at risk of losing money with a variable policy since earnings are based on markets, which have no guaranteed return. On the flip side, it’s possible to earn more cash value than you could get with a rate-capped universal policy.[1, 5]

In other words: more risk, more (potential) reward.

In general, a variable universal insurance policy, because it lasts a lifetime, costs more than a term policy.[6] The best way to understand how much a variable universal policy would cost is to get an online quote from the insurer or from a quote comparison site.

Because variable products carry more risk than other types of life insurance, they can be the wrong call for some people. But, for those who are OK with the risk or are willing to purchase a rider to protect their coverage, it may be a useful financial product.[2]

“Variable universal life products are attractive to individuals wanting some control over the investment of their cash values and the ability to increase or decrease their life insurance protection,” says Pierce. “As mentioned, variable universal life is also an investment product, so it is important for policyholders to understand investments.”

If you’re interested in the cash value aspect, both whole life and universal life policies offer that without the investment risks associated with variable universal life insurance.[5] Or skip the cash value altogether and get a cheaper, 10- to 30-year term policy. Study your options with caution, and reach out to a Certified Financial Planner if you need further help.