variable universal
life insurance
Variable universal life insurance (VUL) incorporates the premium flexibility features of universal life insurance with the policyowner-directed investment aspects of variable life insurance.
Variable universal life insurance incorporates the death benefit designs applicable to universal life policies—either a level death benefit or an increasing death benefit design where the policy provides a constant fixed amount of protection in addition to the cash accumulation account. Under the first option, the death benefit usually does not change, regardless of how positive or negative the investment performance under the contract is. If the policyowner wants to vary the death benefit with the performance of the investments under the contract, he or she must choose the increasing death benefit design. Any increase or decrease is then a direct result of the accumulation balance.
Distinctive Features of Variable Universal Life Insurance •Premium flexibility of universal life
•Death benefit design flexibility of universal life •Investment flexibility of variable life
Variable universal life policies offer the policyowner a choice among a specified group of separate investment accounts that the insurance company itself usually creates and maintains. Some insurance companies have made
arrangements with other investment companies to utilize separate account portfolios that those investment management firms create and maintain. Like variable life insurance, variable universal life insurance policies are classified as securities and subject to regulation by the SEC. The SEC requires registration of the agents who market the product, the separate accounts that support the contracts, and the contracts themselves. In addition, policies must conform with the SEC requirements that the investment funds be in separate accounts that are segregated from the insurance company's general investment portfolio and are therefore not subject to creditors' claims on the insurer's general portfolio should the company face financial difficulty. As with all insurance, variable universal life contracts are also subject to regulation by state insurance commissioners. Because variable universal life is a registered investment product, policies must be accompanied by a prospectus, which is governed by the same rules that are applicable to prospectuses for variable life insurance policies. The prospectus provides the necessary information for a meaningful evaluation and comparison of policies.
Variable universal life insurance is similar to universal life insurance, but with the added feature that the policyowner chooses the investments, as under fixed-premium variable life insurance contracts. Variable universal life offers the policyowner both flexibility and the potential for investment gain or loss. There are no interest rate or cash value guarantees and very limited guarantees on the applicable maximum mortality rates. Policyowners have wide-open premium flexibility under a variable universal contract and can fund it at whatever level they desire, as long as it is at least high enough to create coverage similar to yearly renewable term insurance and not in excess of the amount that would drive the cash accumulation account above the maximum threshold set forth in the Internal Revenue Code. Policyowners do not need to negotiate with or inform the insurer in advance of any premium modification or cessation.
Variable universal life contracts permit partial withdrawals that work like those under universal life policies. Early partial withdrawals may be subject to surrender charges, which apply to surrenders during the policy's early years, when the insurance company is still recovering excess first-year acquisition costs. The surrender charges vanish at a specified policy duration.
Policyowners can aggressively prefund variable universal life insurance so that later the policy can completely support itself from its cash value. If
large premiums are contributed to the contract, this self-support can be accomplished in a relatively short period. As with universal life insurance, variable universal life policies have no guarantee that once the cash value is large enough to carry the policy, it will always be able to do so. The policyowner assumes the uncertainty of investment return and, to a limited extent, some of the uncertainty of mortality rate charges. Consequently, the policyowner may either pay more premiums or reduce the death benefit at some future time if, in fact, the cash value subsequently dips below the level needed to totally prefund the remaining contract years.
Choosing the increasing death benefit option under a variable universal life contract affords policyowners an automatic hedge against inflation. This inflation protection is general in nature and subject to a timing mismatch in that investment experience may not keep pace with short-term bursts of inflation. Over the long haul, however, the investment-induced increases in coverage should equal, if not exceed, general increases in price levels. As with variable life, the policyowner is able to switch investment funds from one of the available choices to any other single fund or combination whenever desired. Some insurance companies limit the number of fund changes permitted before charging the policyowner for additional changes. Policyowners can switch investment funds without incurring any internal or external taxation of inherent gains in the funds. The internal buildup of the cash value is tax deferred at least as long as the policy stays in force and will be tax exempt if the policy matures as a death claim.