How Variable Universal Life Insurance Works: A Complete Guide

What Is Variable Universal Life Insurance?

Variable Universal Life Insurance (VUL) is a type of permanent life insurance that combines lifelong death benefit protection with a unique investment component. Unlike traditional life insurance policies, VUL gives you the opportunity to build cash value through market-based investments while maintaining the flexibility to adjust your premiums and death benefit as your needs change.

At Champs Insurance, we help clients understand whether VUL is the right fit for their financial goals. This comprehensive guide will walk you through everything you need to know about how Variable Universal Life Insurance works.

How Variable Universal Life Insurance Works

Understanding VUL requires breaking down its three core components:

1. Premium Payments

When you pay premiums into a VUL policy, your money is allocated in the following way:

• Cost of Insurance (COI): Covers the death benefit protection
• Administrative Fees: Policy maintenance and management costs
• Cash Value Account: The remaining amount goes into your investment subaccounts

2. Investment Subaccounts

The distinguishing feature of VUL is the ability to invest your cash value in various subaccounts, which function similarly to mutual funds. These typically include:

• Stock funds (domestic and international)
• Bond funds
• Money market funds
• Balanced/hybrid funds
• Index funds

3. Death Benefit Options

VUL policies typically offer two death benefit options:

Option	Description	Best For
Level Death Benefit	Fixed death benefit amount; cash value growth doesn't increase the payout	Lower premiums; estate planning
Increasing Death Benefit	Death benefit equals face amount plus accumulated cash value	Maximizing legacy; wealth transfer

Key Features of VUL Insurance

Benefits of Variable Universal Life Insurance

1. Permanent Coverage: Unlike term insurance, VUL provides lifelong protection as long as premiums are maintained.
2. Investment Control: You decide how to allocate your cash value among available investment options.
3. Tax-Deferred Growth: Investment gains accumulate without immediate tax consequences.
4. Estate Planning Tool: Provides liquidity for estate taxes and wealth transfer strategies.
5. Supplemental Retirement Income: Access cash value through loans or withdrawals during retirement.

VUL vs. Other Life Insurance Types

Feature	Term Life	Whole Life	Universal Life	VUL
Coverage Duration	Temporary	Permanent	Permanent	Permanent
Cash Value	None	Guaranteed	Interest-based	Market-based
Premium Flexibility	Fixed	Fixed	Flexible	Flexible
Investment Control	None	None	Limited	Full
Risk Level	None	Low	Low-Medium	Medium-High

Who Should Consider VUL Insurance?

Variable Universal Life Insurance may be a good fit if you:

• Have maximized other tax-advantaged retirement accounts (401k, IRA)
• Need permanent life insurance protection
• Have a moderate to high risk tolerance
• Want active control over investment allocation
• Are looking for tax-advantaged wealth accumulation
• Have estate planning or business succession needs
• Have a long-term investment horizon (10+ years)

How to Get Started with VUL

1. Assess Your Needs: Determine your coverage requirements and financial goals.
2. Consult an Expert: Work with a licensed insurance professional who understands VUL products.
3. Compare Policies: Review multiple carriers for fees, investment options, and policy features.
4. Review Illustrations: Understand guaranteed vs. non-guaranteed projections.
5. Monitor Regularly: Review your policy annually and adjust investments as needed.

Frequently Asked Questions

Is VUL a good investment?

VUL can be a valuable tool when used correctly, but it's primarily an insurance product with an investment component. It's best suited for those who need permanent coverage and want tax-advantaged growth potential.

Can I lose money in a VUL policy?

Yes. Since cash value is invested in market-based subaccounts, losses are possible. However, the death benefit remains protected as long as the policy is in force.

What are the fees associated with VUL?

VUL policies typically include mortality and expense charges, administrative fees, investment management fees, and surrender charges for early withdrawals.