How Variable Universal Life Insurance Works
When considering variable universal life insurance, it is important to understand the main components of the plan: the premium, the cash value, and the death benefit. The way a typical VUL plan works is that every time you make a premium payment, a percentage will go toward keeping the death benefit in place. The remainder of the premium goes toward the policy’s cash value.
Once you have cash value in your plan, you can invest it in different types of securities that resemble mutual funds. If your cash value continues to perform well, you have the option to use it for things such as increasing your death benefit, withdrawing it as cash, or even using it as collateral for a loan.
Building Cash Value
How the cash value works in a variable universal life insurance plan is unique compared to other permanent life insurance policies. Regardless of which plan you choose, you will be given a prospectus that details around 20 to 30 options you can invest in. Many of the options are comparable to mutual funds, with sets of securities that your money will be invested in.
While you have control over your investment objectives, it is important to keep in mind that there are fixed interest investment options provided by the insurer as well. There are general fees that come with this type of plan since it is managed by a financial professional, but the investment risk is lower overall.
Flexible Premiums
The cash value structure of a VUL policy allows you to have some flexibility in your premiums.
For example, if you wanted, you could pay a larger amount in premiums or use the cash value to pay the monthly fees. Typically, a life insurance company will give you a minimum or maximum premium that you have to pay, meaning that you could do any of the following:
Pay a portion of your premium out of pocket and fund the rest with your cash value
Pay all of your premium with the cash value if it is large enough
Pay more than your target premium in order to overfund your policy and build your investment gains more quickly.
The Death Benefit
The death benefit of a variable universal life insurance plan is normally structured in one of two ways—a level death benefit or a face amount plus cash value benefit.
In the level death benefit option, the payout is equal to the face value of the policy when you purchased it. The face amount plus cash value benefit costs more, but beneficiaries will receive both the cash value and face value of the policy.
It is important that regardless of which plan you choose, you review your policy’s overall terms. Some provide a guaranteed death benefit, while others may pay out a lower death benefit if your cash value underperforms.
Don’t forget to compare life insurance prices and policies on Insurify before buying a policy!