Variable Universal Life Insurance

Variable universal life insurance (VUL) is one of three types of permanent life insurance. However, this type of policy is unique, as it is the only permanent type of life insurance that is considered investment grade. Unlike other forms of life insurance, individuals purchase VULs for their investment benefit, looking at the death benefit proceeds paid from the policy as almost an afterthought.

When premiums are paid into a VUL policy, a portion goes to pay for the cost of insurance, a portion is recouped for policy fees, and the remainder is deposited into the investment accounts as dictated by the investor’s asset allocation model. The list of investment options in which to select from will vary among insurance companies. But, most policies will offer mutual fund like sub-accounts across major asset classes; large cap, mid cap, small cap, international, real estate, and a variety of bonds. In addition to the investment sub-accounts, most VUL policies will also offer a cash equivalent account.

Unlike whole life and universal life insurance policies, the insured’s cash value within a VUL is subject to market risk. In fact, a typical insurance representative cannot offer a VUL product to a client without carrying both an insurance license and a license to sell securities.

While VUL policies offer many of the same features and benefits that other permanent policies, they are designed to fill the need for future tax free income or investments within an investor’s overall portfolio.

Common Uses for Variable Life Policies

Why do people purchase any type of life insurance? The two most basic reasons are to protect someone they love, or to pay someone they owe. When expanding upon these concepts, there are a number of reasons someone would purchase a variable universal life insurance policy in particular, including:

• To cover final expenses- $10,000- 15,000 is sufficient to cover most average burial costs
• To provide a source for income replacement for a surviving spouse or child
• An alternative to term insurance
• To provide tax free income to be used for college planning or retirement planning

While VUL policies can be purchased for a variety of reasons, the most common is to generate tax-free sources of income, particularly attractive to individuals in high tax brackets.

VUL’s Premium Flexibility

Investors considering a VUL policy are often attracted to its immense flexibility. Similar to its permanent insurance counterparts, VUL policies offer the ability to vary premiums paid, the death benefit and the cash value. One feature that whole life and universal life policies don’t offer, is the ability to modify investment choices within the cash accumulation account.

With regard to the policy’s premium, VULs offer a variety of options. The insured can pay the policy minimum, the annual maximum, or anything in between. To create the most efficient policy, it is highly recommended that the insured invest as close to the maximum amount allowable per year. This amount is calculated taking into consideration the insured’s age, the total death benefit selected and the insured’s rating. And, this amount is often significantly higher than the policy’s minimum amount. It is important to note that while these numbers seem higher than other types of life insurance, a great proportion of the premium will be placed into the investment account where it stands to see market gains annually.

Premiums paid into a VUL can be made on a monthly, quarterly, semi-annually or annual basis. One of the most unique features about a VUL policy is that in the event that you don’t reach the investment maximum for the policy each year, you can add those funds at a later date should they become available. For example, if the policy’s maximum investment contribution amount is $2,500 per year, and you contribute $1,500 per year over 5 years, in the 6^th year, you could contribute the year’s $2,500 plus $5,000 in catch up contributions. This flexible feature is particularly attractive to individuals paid on commission or a bonus structure, as their incomes tend to be less flexible.

Variable Life Features

A VUL’s features will vary based upon the underlying life insurance company and their offerings. But, there are some policy basics that are considered universal, which include:

• No Lapse Guarantee– When added to a VUL policy, the death benefit becomes guaranteed after the insured pays the annual premium over a specified period of time (i.e. 5 years). This guarantee is offered even if the cash value drops to zero.
• Tax Benefits– As mentioned previously, one of the most attractive features of a VUL policy is the potential for tax free withdrawals. When the policy is in force, the insured has access to the capital accumulated in the form of loans. While the word ‘loan’ implies a repayment requirement and/or interest, many VUL policies will deposit interest equal to the interest rate as an offset. And some VUL policies repay the loan at death through the face amount proceeds, reducing the amount the beneficiaries will receive. These tax free withdrawals can be used to fund any financial goal, including college planning, purchasing a home or even retirement. In addition to tax free withdrawals, cash accumulated within the policy is treated on a tax deferred basis.
• Death Benefit– The policy’s death benefit will be paid to the named beneficiaries upon the insured death. Death benefit proceeds are received by the beneficiaries on a tax free basis.
• Disability Waiver of Premium– While VUL policies offer a number of rider options, this is the most commonly added. A disability waiver of premium rider pays the insured’s ongoing insurance premiums in the event that they suffer a disability. Most individuals confuse the term disability, often associating it with an accident. However, the most common causes for disability include cancer, heart disease, stroke, depression, lower back issues and complications due to pregnancy. This rider will allow the underlying insured to maintain their much needed life insurance despite suffering a disability, which can often cause financial strain within their household.
• Convertibility– This is often not offered as a rider, but as a built-in policy feature. A convertible policy is one that can be converted into one of the other three types of insurance (whole life or universal life) at the same or lower death benefit, without the need to submit evidence of insurability. For example, if the insured is diagnosed with terminal cancer, and no longer wants to make ongoing VUL premium payments, they can convert their coverage to one of the other permanent insurance types in an effort to reduce the ongoing premium. This conversion can be done without proving insurability, which due to the cancer diagnosis, is of tremendous benefit.

How Much Coverage do you Need?

This can often be confusing for many consumers to determine, as many different opinions exist within the financial community. While some professionals suggest you need 5-10x your income in total insurance to sufficiently provide for a survivor’s income needs, the true answer to the question posed depends on each individual’s financial situation and goals.

Consider what you intend to use the death benefit proceeds for, how much other current life insurance coverage you currently have in force, and your annual budget is when determining how much additional coverage to add via a VUL policy. A VUL policy is often purchased in addition to other permanent coverage, and larger term policies, where together, they cover the insured’s death benefit need.

Comparing Insurance Company Offers

If you feel that a VUL policy is suitable for your given financial situation, you need to spend time gathering several quotes from a variety of insurance companies for comparison. As each insurance company’s offer will vary, it is important to ensure that you are comparing like policies.

Be sure to review the following information:

• Rating class quoted/offered (rating class offered is at the time of underwriting submission and presented is in your bound insurance offer)
• Policy features and benefits
• Cost of insurance
• Internal policy fees
• Investment options
• Guaranteed interest rate in the cash sub-account
• The financial ratings of the underlying insurance company
• The insurance company’s history of cost of insurance increases

As you compare VUL policies, you will notice that they vary more than other types of insurance policies (term, whole life and universal life). Most of the policy variations will be found in the investment options available, the cost of insurance and the policy fees. Like with any insurance policy, be sure to read the outline of coverage in addition to the prospectus, which should be presented to you for review with your initial application.

Once you have selected an insurance company to submit your VUL application through, you will be asked to complete both a telephone interview and a medical exam. Depending upon the death benefit applied for, you may be asked to complete either a simple paramedical exam, or a full paramedical exam. A full exam often involves an EKG in addition to the basic requirements of blood work and a urine sample.

VULs are truly unique insurance policies that offer tremendous benefits to the insured party. With potentially tax free withdrawal options, extensive investment choices and flexible options, VULs are strong options for anyone looking to diversify their investment portfolios using insurance as a vehicle.

*Variable Universal Life products are offered through APA’s Broker Dealer affiliate.  Please contact us for more information