Oct 29, 2020 4 min read

The third type of permanent life insurance is variable universal life, which has all the features of a universal life insurance policy. Like standard universal life insurance, the premium is flexible.

VUL insurance policies typically have a maximum cap and minimum floor on the investment return associated with the savings component. The minimum could be as low as 0% on returns that the investment part receives.

A variable universal life insurance policy combines a savings component with a separate death benefit, allowing for greater flexibility. The savings component is made up of a group of sub-accounts that work like mutual funds. Each sub-account provides the potential for greater risk and, hopefully, greater return.

One goal of a VUL policy, like a UL policy, is to change the risk of the investment return from the issuing life insurance company to the purchaser of the policy. The purchaser accepts this change with the hope of a greater return on his or her premium dollars.

Permanent life insurance is designed to provide a death benefit at any point in the insured’s lifetime. With whole life insurance, an insured enters into a contract that basically requires him or her only to make premium payments. The insurance company bears the risk of investment returns.

With a universal life insurance policy, the insured, with the hope of higher interest rate returns or less cost, bears the risk of the investment returns.

A variable universal life policy enables the insured to invest in the securities market with, again, the same hope of higher returns. The insured must understand that with the risk now belonging to him or her, it is a possible there will not be a death benefit in the future.

When I mentioned less cost in the previous paragraph, I was referring to the ability of higher investment returns that would offset the cost of the death benefit and administrative fees. This would enable you to pay fewer premiums.

I must warn that this approach may look great on paper, with a fluctuating stock market and changing interest rates. But underfunding of a VUL or UL should never be advised. You can request an illustration showing the minimum premiums needed to provide a death benefit for the entire life of the insured.

There are certain rules that apply to individuals when they make purchases of securities. These rules are based on suitability and risk tolerance. Suitability means matching the investor with financial advice strategies and products that are appropriate for their circumstances, personality and goals.

Risk tolerance is the degree of variability in investment returns that an investor is willing to withstand in his or her financial planning. Greater returns are not worth sleepless nights. Those with a higher net worth and more disposable income can also typically afford to take greater risks with their investments.

All marketers of VULs must be licensed to sell securities. They must gather information about you, the purchaser, to determine your suitability and risk tolerance. They should determine whether a VUL is the correct product for you and explain why or why not it works for you.

VULs are complicated products and are not suitable for every person. On the other hand, for the knowledgeable purchaser with the proper advice, this can be an excellent solution to providing life insurance needs and investment returns.

Bob Hollick is a State Farm Insurance agent based in Washington. His column appears every other Thursday in the Observer-Reporter.

To submit columns on financial planning, investing or business-related matters, email Rick Shrum at rshrum@observer-reporter.com.