Variable universal life insurance
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A variable universal life insurance policy (or VUL) offers permanent protection, flexible premiums, and the potential for greater cash value growth because it lets you invest in stocks, bonds, and other securities via subaccounts. 1It can be a powerful, tax-efficient tool for building and protecting finances. Read on to see how it works and determine if it's right for you.2
The four key features of a variable universal life policy
Permanent protection | Asset-building cash value | Market investment options | Adjustable premiums |
|---|---|---|---|
From day one, an income tax-free lump-sum death benefit is payable to your beneficiaries. It's designed to last your entire life, but the benefit amount isn't guaranteed – it can fluctuate depending on investment performance and other factors. | Part of each premium dollar goes to the cost of insurance and fees, and the other part goes into the policy's cash value, where it can grow tax deferred. It's an asset that can be used for policy loans, help supplement retirement income, or fund other needs while you're alive.3 | The cash value can be invested in grouped stock market and bond securities called "subaccounts.” This provides additional growth potential than other policies, along with the risk of investment loss if markets go down. | Like other universal life policies, VUL gives you the flexibility to raise or lower premium payments as you see fit, within certain limits. But paying minimum insufficient premiums for a prolonged period could lead to higher premiums in later years to maintain coverage. |
How variable universal life compares to other permanent life insurance options
Whole life insurance vs. variable universal life
Both types of policies provide permanent coverage and tax-efficient cash value, but a whole life insurance policy has more guarantees than VUL.4 The premium and death benefit of a whole life policy are guaranteed to remain the same for life, and cash value grows at a guaranteed rate.5 Mutual companies (such as Guardian) may also provide dividends that can boost cash accumulation.6 Over time, however, the market-based subaccounts of a VUL policy can offer more potential for cash value growth as long as you are willing to tolerate the downside risk of investment losses.
Universal life insurance vs. variable universal life
Standard universal life insurance policies provide permanent coverage and tax-efficient cash value, along with a VUL policy's flexible premiums and death benefit.7 However, there are no subaccount investments. Instead, the cash value is guaranteed to grow at a minimum interest rate. While these policies don't earn dividends, values can grow faster than the guaranteed rate depending on the insurance company's investing performance. Even so, the market-based investments of a VUL policy can offer more cash growth potential, along with the downside risk of investment loss.
Permanent life insurance policy features at-a-glance
Benefits | Variable Universal | Whole | Universal |
Fixed death benefit |
| ✔ | |
Access to cash value | ✔ | ✔ | ✔ |
Permanent protection | ✔ | ✔ | ✔ |
Potential investment growth | ✔ | ||
Premium flexibility | ✔ | ✔ | |
Tax advantages | ✔ | ✔ | ✔ |
For market growth potential with limited downside risk, consider an indexed universal life policy
Indexed policies are similar to variable policies, but they accumulate cash value somewhat differently: indexed policies tie account value to the performance of an index such as the S&P 500, with caps for minimum and maximum rates of return.8 So, for example, in a year where the index is up 20%, you may only see a 10%-12% gain. But if your chosen index is negative for the year, your cash value may stay the same or even grow slightly (depending on the specific terms of the policy). Each insurance company has its own selection of indices available, and you may be able to choose more than one. You may also be able to allocate a portion of your funds to a fixed-rate interest option.
Indexed universal life insurance policies offer the premium flexibility of a standard universal policy with greater upside growth potential. But unlike a variable universal policy, your money isn't directly invested in outside securities, which helps life insurance companies to minimize downside risk.
Variable life insurance is not the same as variable universal life insurance
It's easy to confuse the two: they both provide permanent protection with market-based growth potential. These policies are considered "variable" because investments and cash account balances are not guaranteed – they can and do vary based on market performance. The main difference has to do with premium flexibility:
Variable life insurance policies do not offer premium flexibility
Like standard universal life policies, variable universal policies let you raise and lower premiums within a certain range.
In both these life insurance products, the policy's death benefit can fluctuate depending on the performance of the underlying investment portfolio and the amount cash value, among other factors.
Is variable universal life insurance right for you?
This type of policy can be a powerful tool for building and protecting family wealth, but it is an inherently complex financial product that isn't for everyone. However, it could be right for your financial future. Ask yourself:
Do you want greater potential for cash value growth – along with a higher level of risk?
Are you comfortable choosing and allocating investments?
Do you want (or need) premium flexibility?
Are you willing to commit to an annual (or more frequent) policy review to manage your investment subaccounts and premium payments?
Are you willing to invest the time to evaluate policy options and customize a strategy to your needs?
If you answered yes to most of the above questions, then it may be time to talk to a professional about specific variable universal life insurance coverage options. Review various "What if" scenarios with your financial professional, for example, to understand what happen to the death benefits if your investment strategy is off, or how to make the most of tax-efficient cash value growth when your investments are up. But make sure you have a financial professional who understands VUL and will take the time to learn about your financial obligations, investment objectives, and risk tolerance. How do you find such an experienced professional? Ask a friend or colleague for a recommendation. Or, we can put you in touch with a local Guardian financial professional who will help you explore the options and compare policy quotes.
Frequently asked questions about variable universal life insurance
It's a type of permanent life insurance protection that provides investment options for building cash value. Policyholders can invest in subaccounts which are market-based securities that can go up or down in value. Since cash value accumulation in these policies depends on the performance of your investment options, it is not guaranteed.
If the policy is a variable universal life policy, it also allows for premium flexibility: monthly payments can be raised or lowered within certain limits stated in the policy. However, paying the minimum for a prolonged period could result in a need to pay higher premiums in later years to maintain coverage.
Compared to other types of permanent life insurance, variable policies offer more potential for cash value growth because the cash value can be invested in market securities. However, since market growth can't be guaranteed, the account balance can and will decrease in value if the underlying investment options do poorly. This could impact your ability to borrow or withdraw funds when needed, affect death benefits, or in some cases, cause coverage to lapse. So, a variable life policy isn't suitable for every individual or financial situation.
A life insurance policy can be variable, universal, neither (like a whole life policy), or both (as is the case with variable universal life insurance). "Variable" refers to how cash value grows. These policies let you invest in market securities with no growth guarantees, so cash value can vary depending on the ups and downs of your investment options and the market. "Universal" has to do with premium payment. A universal policy has variable premiums: it lets you raise and lower payments within a certain range defined in the policy contract. This helps make the benefits of a permanent life insurance policy more attainable for people with fluctuating incomes.