VUL Insurance Options

Variable Universal Life (VUL) is a form of permanent insurance. Like whole, universal, and variable life policies, VULs are cash-value life insurance policies. The term "universal" in the name comes from the fact the premiums associated with this type of policy are flexible. The variable term refers to the choices that the policy owner has.

With a VUL policy, the owner can direct the investments in the policy creating variability in the cash value. The cash value of the policy can be invested in equities or fixed-interest products depending on the options that are available. However, most purchasers migrate toward a VUL product because they want to use the equity investment options.

There are greater risks associated with a VUL policy than a universal policy. If the performance of the investments is particularly poor, the premiums may need to be increased to keep the policy active.

VULs, like whole-life policies, experience tax-deferred growth that can be borrowed against. The tax-deferred growth is what attracts some customers to the product. Owning a VULs is comparable to being able to buy life insurance and to invest money in a mutual fund at the same time. Except, where mutual funds have capital gains tax and other income-tax obligations, VULs do not.

One area where those interested in VULs need to be cautious is the borrowing function of the product. If a purchaser decides to borrow against the policy and the cash value of the policy drops to a point where the payments are not enough to maintain the policy, any previous loans that were tax-free could be viewed as taxable income. In other words, if a policy holder borrows too much against the policy, a collapse could be triggered.

VULs are usually favored by customers who can invest a high level of funds in the policy and who are going to leave the funds in the policy for the long-term. In this way, they can have the most benefits from the tax advantages associated with the product.

Potential reasons for purchasing VUL insurance are as follows:
• Accumulate a pot of money that will only be used after the owner is dead by the beneficiaries.
• Accumulate a pot of money that can be borrowed from in retirement to live on.

In summary, the benefits of VULs are that they offer flexibility in the premium and the death benefit. There is also the ability to have cash value growth depending on how the underlying assets of the policy perform. Finally, VULs allow holders to withdraw funds or to borrow against the policy.

The disadvantages of VULs are that the premiums can be more expensive than other types of permanent life insurance and that customers need to have an understanding about the securities market to make the best decisions about the underlying investments. VULs also have a higher risk associated with them than other types of insurance. The success of the overall policy is dependent on the ability of the policy owner to make wise investment choices.