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Understanding variable universal life insurance

Allen Wastler

Posted on August 15, 2022

Allen Wastler is a former financial journalist with over 30-years of experience, including time at CNBC, CNN, and Knight-Ridder Newspapers.
Understanding VUL insurance
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Detail what benefits variable universal life insurance has in common with other types of permanent life insurance.

Describe the investment and premium features that differentiate variable universal life insurance.

Explain why “for someone fairly young and not overly risk adverse, variable universal life insurance might be a good fit.” 

If you are shopping for life insurance, among the choices you’ll likely encounter is variable universal life insurance (VUL).

This kind of life insurance offers some financial flexibility in addition to protection, which may be advantageous for certain policyowners. But it is important to understand its features before deciding if it is right for you.

Part of the permanent life insurance family

To begin with, VUL is a type of permanent life insurance. This is life insurance that offers a death benefit throughout a policyowner’s life, provided the premiums are paid for a specified period. Permanent insurance is distinct from term insurance, which only provides coverage for a specified time period.

Further, permanent life insurance offers:

  • Tax-deferred growth of cash value.
  • The ability to borrow against the policy’s cash value.

VUL policies, in contrast to other permanent policies, provide different investment options for cash value accumulation. Similar to mutual funds, these investment options have different investment characteristics, including market-based performance. Typically, there is also a fixed account option, which offers a guaranteed interest rate.

Through these account options, policyowners can allocate their account value into investments that align with their specific goals while accommodating their tolerance for market and investment risk.

VUL policies may appeal to those who want cash value growth based on investment returns, in addition to basic life insurance protection for their family and loved ones. Further, the death benefit of these policies must always be a certain percentage higher than their cash value, which means that significantly positive performance in the investment options could cause the level of life insurance protection to increase in the future.

Another VUL difference

Whereas other kinds of life insurance policies require premiums to be paid on a stated schedule, VUL allows for greater premium flexibility. A policyowner may adjust the amount they pay each year — or even month to month — in premiums, as long as there is enough cash value to cover the cost of insurance and administrative charges of the policy. (Related: The flexibility in universal life insurance)

To address the risk that a policy may not have sufficient cash value to ensure these costs are covered, VUL policies often offer some type of alternate guarantee that the policy will not lapse for a certain period of time based on level of premium paid.

So, VUL allows a policyowner to choose the amount and the frequency of their premium payments, within certain limits, while also providing access to different investment options. That gives a policyowner the opportunity to coordinate the cost of their insurance with the returns in their cash value account.

Taken altogether, VUL allows a policyowner to:

  • Potentially earn higher returns compared with other types of coverage.
  • Have flexible payment options.
  • Maintain personal control of investments and risk.
  • Preserve a guaranteed death benefit level (provided minimum premium levels are met).

If the returns in the account’s investments are positive, it could cover the cost of insurance and administration for the policy while also adding to the cash value. Significant positive returns could also potentially increase the size of the death benefit of the insurance policy or allow the policyowner to consider adjusting future premium payments downward.

On the other hand, the account could decrease in value, because it is tied to market performance. That, in turn, could affect the amount of funds available to pay for the death benefit. That may necessitate the policyowner paying more in premiums. (Related: Understanding your risk profile)

The combination of investment options with premium flexibility may appeal to those who want the freedom to control investment decisions as well as their level of premium payments.

At the same time, the investment and premium choices can sometimes get complicated, depending on personal financial situations. Many people opt to consult a financial professional about their choices. (Need a financial professional? Contact us)

Who should look at VUL?

If you know how much life insurance protection you need, but want the potential for greater coverage through investment gains or balance the cost of insurance with other savings goals, VUL might be attractive.

At the same time, potential policyowners should be aware of the risks involved in market participation and their own tolerance for possible investment losses.

“For someone fairly young and not overly risk adverse, variable universal life insurance might be a good fit,” said J. Todd Gentry, a financial professional with Synergy Wealth Solutions in Chesterfield, Missouri. “The risk that is being retained is market risk, and for someone who is young enough and has enough time to let that market risk play its way out, this kind of policy in the long term can be an advantage.”

Also, like other types of life insurance, VUL policies can come with a variety of added features, called riders, specific to the issuing carrier. These can include provisions to accelerate the payment of a portion of the death benefit to help meet health care needs or the ability to increase coverage in the future without the need for a medical exam. (Related: Understanding riders)

What advantages are right?

“For me, getting a VUL policy was about being young and focusing on the tax-deferred growth as opposed to a death benefit,” said Doug Collins, a financial planner at Fortis Lux in New York City. “Now that I’m a few years in, I was just able to take a small loan to supplement home improvement projects and can pay it back any time.”

For those who want these features without the element of market risk, whole life insurance may be the solution. This kind of permanent policy offers lifetime protection with tax-deferred cash accumulation. But the cash value grows based on a set interest rate guaranteed by the carrier.

“For a conservative client, whole life is probably the better fit,” said Gentry. “VUL premiums may be lower, but that’s because with VUL you are assuming market risk, while the carrier assumes all the risk and guarantees a certain level of return with whole life. Also, if you plan to draw on your VUL cash value in the future, market volatility could negatively affect you through sequence of returns risk.”


The investment choices and flexible premiums offered by VUL policies may be attractive for certain individuals. But it is important such potential policy owners understand the market risks involved and the commitments required in exchange for these opportunities. In many instances, a financial professional can provide guidance about the choices.

Learn more from MassMutual …

9 questions to ask when shopping for life insurance

Is group life insurance enough?

When life insurance morphs

This article was originally published in July 2020. It has been updated.


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The information provided is not written or intended as specific tax or legal advice. MassMutual and its subsidiaries, employees, and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own and do not necessarily represent the views of MassMutual.