Introduction to Variable Universal Life Insurance

Universal Life Insurance is favored by many people because of its flexibility. Variable Universal Life Insurance, which is a variation of Universal Life, is even more popular with investment minded clients.

The concept behind Universal Life Insurance is that premiums are paid into an account and the account is used to provide basic insurance protection while at the same time accumulating a cash value that is used for investment purposes. Each premium period, a certain sum is subtracted from the account to pay for the cost of insurance. This amount is called the COI. Since the expected premium payment would often exceed the COI, the excess is kept in the account and invested to earn interest.

The excess premiums and earned interest continue to accumulate in the account. Once enough cash value exists, it would be possible to skip a premium payment without endangering the policy and its coverage. The COI would simply be subtracted from the cash value. Although this is not how you would normally want to operate, it illustrates the major difference between Universal Life and Whole Life Insurance. In Whole Life, a missed premium payment could lead to loss of protection.

The cash value continues to grow in the Universal Life Policy until the "Endowment" age which is usually 100 years of age. Of course, the death benefit is paid in full if an untimely death occurs. In some policies, the death benefit can be increased subject to insurability and at a higher COI amount and likewise it can be reduced when it is deemed less protection is needed. In some cases, the death benefit is reduced to reflect the increased amount of cash value in the policy. The tax advantages and potential of Universal Life as an investment vehicle is testified to by the fact that the Internal Revenue Service has restrictions on the maximum premium amount that can be paid in any given year.

So, how does Variable Universal Life differ? The major difference in Variable Universal Life is that the client has a great deal of control over the investment options. Universal Life is usually tied to a financial index selected by the insurer. Variable Universal Life allows the client to select from various investments much in the same manner as mutual funds. This allows the client to take more chances as some of the options include higher risk/ higher return investments.

Variable Universal Life Insurance allows a person to combine saving, investing, and risk protection into one neat and tidy package. The critics seem to focus on only two issues when discussing Variable Universal Life. The first is that these financial functions are by their nature unrelated and should not be combined. This violates basic financial planning principles that call for a coordinated overall plan. The only other criticism seems to be that Variable Universal Life Policies offer better commissions to Insurance Agents. This might be true, but it hardly changes the fact that they offer the client more than mere protection for their life insurance expenditure.

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