Benefits of Variable Life Insurance

Variable Universal Life Insurance is often shortened on paper to a VUL.  It is a type of life insurance that builds cash value.  Within the family of VUL's, there are a huge variety of ways the cash value money can be invested. Often, there are a variety of choices within a policy as to where the contract owner can postition the cash value.  These include such options as bonds, stocks, or various other investment vehicles.  The word "universal" comes in to play because the owner has some flexibility in making premium payments. If there is a tough month in cash for the owner, they can pay nothing, another month, they can put in the maximum amount as defined by the IRS.  In contrast, a whole life insurance policy has a fixed payment schedule that can never be changed or missed without lapsing the policy. 

WIth a VUL, the owner has a permanent life insurance because upon death of the insured, the death benefit will be paid.  With most variable life policies, there is no endowment age.  This is an advantage over a whole life policy where at a specific age, the entire death benefit amount will be paid out regardless of if the insured is dead or not.  The death benefit in that case is limited to the face amount of the policy.  This would be bad for the beneficiary because with death or endowment the insurance company would keep all the cash value that had built up over the life of the policy.  With most VUL policies, the amount of the death benefit plus the build up of all cash value is paid out upon death.  Better.  Much better than a whole life policy. 

If you are simply looking for a way to get some life insurance coverage in the event of death, your best bet is to just get a Term Life insurance policy. If you have a bunch of money that you want to transfer to other people, such as a spouse or children, then a VUL is a pretty good way to do it. Bear in mind, you must follow the rules exactly or else you can void the policy and subject the money to estate tax liabilities. Consult an insurance expert and a tax expert to make sure you do this right--if this is your intention.

Variable life insurance has special benefits under the IRS code.  The cash value of the life insurance is able to earn investment returns without ever being subject to income tax.  There are some rules in place to ensure that the policy does meet the definition of life insurance and that the policy stays "in force" or current. 

For instance, one use of a VUL is to give a yearly stipend to children by funding VUL policies to them under the gift tax exemption.  It is fairly simple to set up and allows a wealthy person to transfer money to heirs without incurring any estate taxes.  Simple, yet effective. 

 The largest risks of a Variable Universal Life insurance policy are fourfold.  Not necessarily in order of importance they are:

1. The cost of the insurance.  They are typically based on term rates and over time the costs can increase significantly.  This begins to take away from the cash value of the policy and can leave an owner with no cash value or no insurance if they don't monitor it carefully.  This is critical to understand.
2. The cash outlay with a VUL is significantly higher with this type of insurance policy.  Many VUL's end up lapsing because the buyers did not anticipate their long term funding requirements for the policy.
3. The Investment Risk with VUL's can be high.  The cash value of the policy is invested in stocks, bonds, or some other potentially losing investment vehicle.  In the case of a VUL, the buyer is assuming the investment risk as opposed to the insurance company having the risk.
4. VUL's are significantly more complex than most other forms of insurance.  If you don't fund and plan properly, you probably will have paid a lot more for insurance than you should have and will end up with nothing to show for it.  No insurance and no cash value.

Be aware of the risks and make sure a Variable Universal Life Policy is the right thing for you before you buy one.  If it is right, they can confer a lot of tax advantages to the buyer.  If it isn't right, you will end up wasting a bunch of money for nothing.