Variable Life vs. Variable Universal: What's the Difference?

Variable Life Insurance vs. Variable Universal Life Insurance: An Overview

Variable life insurance and variable universal life (VUL) insurance both combine investing with life insurance protection. Both let you put your cash value in various investment funds. Your future cash value balance and death benefit depend on this investment performance.

The key difference is flexibility. Variable life insurance charges the same premium each year and does not allow you to change your death benefit. Variable universal life insurance lets you change your premium each year as well as your policy death benefit. This overview will let you decide which is right for you.

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Variable Life Insurance

With variable life, you pay a fixed premium that does not change each year. Part of this premium covers your insurance cost, and the rest goes into your cash value. You invest your cash value in a selection of investment subaccounts, similar to mutual funds. Your risk tolerance and investment objectives determine which investments make the most sense for your policy.

Your cash value grows tax-free as long as it stays in the life insurance policy. You can withdraw your cash value while alive, but you would owe income tax for taking out gains above what you paid in premiums. You could also borrow your cash value through a loan. Taking money out of your policy reduces the future death benefit.

Your cash value balance and future death benefit depend on the investment performance. If your investments do well, you have more cash value to tap into while alive and a larger death benefit for your heirs. Poor investment performance can reduce both. However, variable life includes a guaranteed minimum death benefit so long as you keep paying your premium.

Advantages and Disadvantages of Variable Life Insurance

Advantages Explained

• Multiple investment options: You can pick between a range of investment funds for your cash value in variable life, similar to investing through a brokerage account.
• Investments can boost cash value and death benefit: If your investments do well, your cash value and death benefit will increase more quickly with variable life versus products like whole life insurance.
• Insurance premium will not increase: You pay the same premium the entire time with variable life. You do not need to worry about a cost increase later in life.
• Guaranteed minimum death benefit: Even though investment losses reduce your variable life death benefit, it will not disappear altogether. Most variable life policies offer a guaranteed minimum death benefit so long as you continue paying the premiums.

Disadvantages Explained

• More expensive than standard life insurance: Variable policies are more expensive because there are administration fees and fees for managing the investments held by the fund.
• Death benefit and cash value can go down: If your investments perform poorly, your cash value will not grow as quickly. In fact, you can lose cash value and see your death benefit go down with variable life.
• No premium and death benefit flexibility: You cannot change your monthly premium for a variable life policy. You also cannot increase or decrease the death benefit yourself.
• Surrender charges apply: Surrender charges are fees for withdrawing cash or giving up coverage before the surrender period is over—many surrender periods for variable life last 10 to 15 years.
  
  

Variable Universal Life (VUL) Insurance

Variable universal life insurance, as the name suggests, is a policy that combines variable and universal life insurance (i.e., flexible variable life insurance). A VUL allows the same types of investment options as a variable life insurance policy. Your cash value growth depends on this investment performance and builds tax-free, so long as it stays in the policy.

A VUL also allows you to alter the insurance coverage with ease. Similar to universal life insurance, you can decide the amount and frequency of premium payments within specific limits. You must pay at least enough each year to cover the underlying insurance cost, which goes up each year. With a VUL, you are supposed to build cash value while young so that you can use it to cover the more expensive premiums as you get older.

Advantages and Disadvantages of Variable Universal Life

Advantages Explained

• Flexible premiums: You can change how much you pay each year for a variable universal life policy. This allows you to adjust payments based on your budget. You must pay at least enough each year to cover the insurance costs, though, which increase over time.
• Adjustable death benefits: Many VULs let you increase or decrease your policy death benefit. You could add more coverage for more protection or decrease coverage to reduce the cost.
• Variety of investment options: Like variable life insurance, a VUL lets you invest your cash value between a variety of investment funds. Your cash value investments grow tax-free as long as the money stays in the policy.
• Investments can boost cash value and the death benefit: If your investments in a VUL do well, your cash value will grow more quickly than with a regular universal life policy or whole life policy. Your death benefit can also increase based on your investment performance.

Disadvantages Explained

• More expensive than standard policies: A VUL charges additional administration and investment fees that you wouldn't owe on a universal life policy. These policies also typically have a surrender charge if you take money out or cancel within 10 to 15 years of your purchase.
• Death benefit and cash value can fall: If your investments do badly, you could lose cash value in a VUL. This can decrease how much is left over for your heirs as a death benefit.
• Costs could go up over time: If you don't build enough cash value in a VUL while young, you might need to pay a much higher premium while older. Otherwise, you'd lose your coverage. These policies take more work for budgeting.
• No guaranteed death benefit: VULs do not offer a guaranteed death benefit. Your cash value and premiums payments must be enough to cover the underlying insurance costs. If a steep market loss wipes out your cash value, you might no longer be able to afford your insurance.
  

Which Is Right for You?

The two life insurance products are similar, so it might be difficult to choose which one is right for you. The key comes down to whether you want simplicity with more guarantees or flexibility with more risk.

To choose between the two, answer these questions:

• Do you want regular premium payments? (VLI)
• Do you want to guarantee a minimum death benefit? (VLI)
• Do you want to be able to alter your death benefit and premiums? (VLU)
• Are you comfortable paying more later in life in exchange for more flexibility? (VLU)

It's important to note that both of these policies require taking on investment risk in your life insurance. Depending on market conditions, your beneficiaries may get more, or they may get less.

Frequently Asked Questions

The Bottom Line

If you are comfortable with investing and taking on more risk, variable life and VUL policies could make sense. Both policies can create a hedge against inflation for your cash value if they outpace it. Variable life can be a better fit if you want predictable costs, whereas variable universal life is better if you want more flexibility, even if managing the policy takes more work. A life insurance agent can help you compare the two types in more detail so you can decide.