Variable Universal Life Insurance: Is Market Risk Too High?

Besides the traditional life insurance products you are used to (permanent life insurance, term life insurance, whole life insurance policy, etc.), you also have the option of variable universal life insurance (VUL).

VUL insurance allows cash value growth, and although it can be your lifestyle banking vehicle, we assign that role to the whole life policy instead. 

Later, you can see why. 

Read this in-depth guide about buying a variable life policy and see whether this insurance is for you.

Table of Contents

    What is Variable Universal Life Insurance?

    Variable life insurance Ultimate Guide
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    Variable universal life insurance is a permanent life insurance policy with a built-in savings component that allows for cash value investment.

    A variable universal life policy became the first choice for people who consider themselves investors, giving them control over how to invest the cash value in their policy. 

    Due to their components, variable universal life policies differ from other insurance policies and can be a powerful tool for building and protecting your finances.

    The ‘variable’ in the policy name refers to varying investment results in the fluctuating market. In other words, it provides increased flexibility and growth potential. But changes in the market could cause policyholders to lose a lot of money, so they should be careful and aware of the risks.

    VUL policies are sold by prospectus, so a financial professional you consult should also provide you with all the information needed.

    VUL Life Insurance Components

    An image showing VUL components
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    Now you have a clearer picture of what VUL stands for. However, you don’t understand its components, such as death benefits, premium payments, cost of insurance, interest rate, insurance coverage, etc. 

    Let’s explore all of it:

    • Flexible premium payments – A VUL policy offers the possibility of flexible premiums, which means that you can skip paying a premium or, at some point, even stop paying the premiums. The condition is that your policy’s cash value can cover the premium amount.
    • Underlying Investment options & Investment risk – A unique feature of the Variable Universal Life Insurance is that it allows you to explore different underlying investment options. You can choose from several investment options for your policy’s sub-accounts, such as the financial and stock market. There is a possibility of transferring investment funds between investments without tax consequences. The value of your policy’s subaccounts depends on the investment performance, meaning that if they do well, your policy’s cash value will increase, and if they don’t, your policy’s cash value will decrease.
    • Increasing (or decreasing) death benefit – This life insurance coverage includes a death benefit, but you can increase or decrease it. In other words, you can request a death benefit increase or make a lump-sum payment to boost the policy’s cash value.
    • Policy loans – The Variable Universal Life Insurance policy allows you to withdraw funds or take out a loan against the cash value. This feature is seen in other permanent life insurance policies.

    Who Can Buy Variable Universal Life Policy?

    This life insurance policy suits people seeking maximum flexibility and control over their investments. It can be a powerful tool that offers lifetime protection, allows you to accumulate cash, and helps you achieve your financial goals. 

    However, with VUL insurance policies comes market risk, and you will not profit from your investment options if your investment objectives are wrong. As for the medical exam, it is more of a formality.

    To understand better if variable universal life policies are the right choice for you, you can ask yourself these 7 questions:

    1. Are you looking for ways to maximize the cash value growth potential?
    2. Are you ready to challenge the risk tolerance that comes with underlying investment options?
    3. Do you feel comfortable choosing and allocating investments?
    4. Do you have clear investment objectives?
    5. How important is flexibility to you?
    6. Can you commit to an annual policy review to manage your investment subaccounts and premium payments?
    7. Are you willing to invest the time to evaluate policy options and customize a strategy to your needs?

    If you have a positive answer to at least five questions, then variable universal life insurance is a good choice. To help you become 100% certain in your decision, we will present you with the pros and cons of this cash-value life insurance.

    Variable Universal Life Insurance Benefits

    There is a reason why many people choose this specific permanent life insurance policy; actually, there is more than one. We highlighted the most significant advantages of variable universal life.

    Death Benefit

    Variable universal life insurance is both an investment product and a life insurance product at the same time. This means that one of the significant benefits is that there is an income tax-free death benefit payout to the insurance beneficiary. Avoiding massive financial hardship can be a considerable benefit.

    It’s important to say that when you buy a VUL policy, you’re buying permanent life insurance. This means you are buying insurance coverage for your entire life—as long as you pay sufficient premiums.

    Just be aware of partial withdrawals and unpaid loans because they can reduce the death benefit.

    Various Policy Riders

    The riders you can add to your VUL vary between different insurance providers, but some common ones include:

    1. Enhanced Disability Benefit – if you become disabled, your policy will not lapse.
    2. Accidental Death Benefit Rider – in case of the insured’s death, your family will receive the additional death benefit.
    3. Overloan Protection Rider – allows you to take significant policy loans without the policy lapsing.
    4. Enhanced Cash Value Rider – high cash surrender value in the first few years of the policy. Cash surrender should always be the last option, so make sure this is the right choice for you before you sign up for it.

    Flexible Payments

    We already talked about this, but we can’t omit to highlight it as a benefit of variable universal life. There are a variety of options for you to use this option:

    • You can pay a portion of premiums – you can choose to pay an amount of your premium using cash and the other part using your cash value. This option is available once your cash value reaches a specific limit.
    • You can choose not to pay premiums – You can allocate funds from your cash value towards your premium payments. Using it this way isn’t the best, but at least your policy will not lapse because you don’t pay premiums.
    • You can make higher premium payments – if one of your main goals is cash value accumulation, you can overfund your policy. That way, you can consider different underlying investment options more quickly. This is a good option if your incomes are high enough to afford it and you wish not to pay later, especially after retirement.

    Entering the Investment market with no Rate Cap

    Policyholders can enter the market using their cash value with no rate cap.

    If the mutual fund in which the cash value is invested returns a rate that exceeds 20%, the total amount is credited to the policyholder’s account (minus the management fees).

    The possibility of participating in the market and exploring different investment options to maximize your cash value growth potential is already great. However, you need to assess your risk tolerance before you jump in and see what works for you.

    Tax advantages

    It is a nightmare to pay taxes.

    How does universal life insurance work in that department?

    Pretty good!

    Not only can you start investing, but you also keep all the tax advantages an insurance policy brings. And that may be the best thing about a variable universal life.

    We already mentioned that the death benefits paid out to beneficiaries are tax-deferred. All gains in cash value are tax-deferred, too.

    This means that you can withdraw money tax-free, and you will be taxed on the growth of the account only if you withdraw beyond your base (premiums paid in).

    An additional benefit is that you won’t face immediate taxation with early withdrawal penalties and the required minimum distributions that the IRS forces on the other tax-deferred products. You can always consult with a tax advisor and read the underlying fund prospectuses to get the right information before you start investing.

    Policy Loans

    Variable life insurance is a cash-value life insurance product. This means that part of the premiums will always go into your ‘savings’, which will grow over time.

    The cash value portion ensures that the premiums will not rise and cause the policy to lapse. Further, it may grow faster if the policyholder knows how to invest wisely.

    The biggest benefit is that you do not have to withdraw your money to access it. Instead, what you can do is take a policy loan and use the accumulated cash as collateral.

    You will be required to pay interest, but it is much lower than the interest rate a bank would charge you. You can choose not to return the loan, which would result in the death benefit being paid out minus the outstanding loans.

    Variable Universal Life Insurance Downsides

    There are always two sides to every coin—in our case, there are a couple downsides to variable universal life insurance. Here are the things you should be aware of:

    Market Risk

    Being able to enter the investment market is a significant benefit, but the price of it might be too high. Variable Universal Life does not offer guarantees, and you can earn or lose money.

    This means that you, as the policy owner, are required to accept the risk. And whether you consult financial professionals for your investments or not is completely up to you.

    Unstable Cash Value

    Variable Universal Life Insurance does not guarantee that the policy value is connected to the market value (if you try to maximize your cash value growth). Your death benefit depends on your skills to increase the cash value over the years.

    If your investments fall through, you can lose the cash accumulated over the years, which will cause further problems for you.

    Higher cost

    With increased benefits, you can always expect an increased price. With access to the financial markets, you will have to pay additional fees, such as policy charges and management fees.

    In total, variable universal life insurance ends up being more expensive than some other life insurance options.


    Variable Universal Life Insurance offers you various investment options—you can invest in mutual funds, money market funds, or even hedge funds. This comes with the responsibility of managing multiple investment accounts.

    Although it offers you permanent protection, owning a variable universal life insurance policy requires greater oversight and knowledge than other life insurance policies.

    It is not for everyone.

    Potential Premium Increase

    There is a catch with your universal life that will occur if you lose a substantial amount of cash value. The death benefit needs to be paid, and in cases like this, the insurer could increase your premiums to cover these costs. If you don’t pay the increased premiums, the policy will likely lapse or need to be modified.

    Variable Universal Life Insurance Alternatives

    As you can see, variable universal life insurance is not an ideal option. Let’s compare variable universal life to other policies people usually consider.

    Variable annuity vs Variable Life Insurance

    The investment return is the main difference between a variable annuity and variable life insurance. With a variable annuity, you can get your money back in a series of payments from the insurance company. With VUL, on the other hand, you can make withdrawals or take loans based on your cash value.

    Another difference is that variable annuities are restricted in a way that you might have to pay a fee to make withdrawals before a certain age. The cash available only limits withdrawals from variable life insurance policies.

    Variable Life vs Term Life Insurance

    With term insurance being one of the most common options, we need to include it in the comparison.

    Variable insurance, unlike term life insurance, has no cap and offers cash value and investment options. All of these are non-existent in term life insurance. Term life premiums, on the other hand, are fixed and lower.

    Overall, term life offers much less than variable universal life insurance.

    Variable Life vs Whole Life Insurance

    Two things are common: lifelong coverage and a modified endowment contract if you overfund the policy by the maximum limit in the first seven years.

    However, you will learn that whole life policy brings much more benefits and way less risk.

    Comparison between whole life insurance and variable universal life
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    Whole life policy offers:

    • Level premiums – the amount of premiums remains the same throughout the policy duration.
    • Guaranteed death benefit – the death benefit is guaranteed and won’t fluctuate.
    • Guaranteed returns – your cash value continues to grow and is usually guaranteed to equal the policy’s death benefit when the policy matures (in case you turn 100)
    • Lower fees – whole life has lower costs than variable universal life.

    Overall, this policy brings you the stability VUL never could. This is why VULs are not used as vehicles for those who start infinite banking.

    And if you take ownership of your lifestyle, you need to become your own bank.