A variable universal life (VUL) is a kind of permanent life insurance plan with a built-in savings part that provides for the investment of the cash value. Like standard universal life insurance, the premium is flexible. VUL policies have both a maximum cap and minimum floor on the investment return connected with the savings segment.
Variable universal life insurance has changeable sub-accounts that recognize for the investment of the cash value. The purpose of the sub-accounts is comparable to a mutual fund. Exposure to exchange fluctuations can make significant returns but could also result in substantial losses. This policy gets its name from the changing outcomes of investment in the ever-fluctuating market.
While variable universal life insurance grants flexibility and growth potential over a regular cash-value or full life insurance policies, policyholders should thoroughly evaluate the uncertainties before purchasing this type of insurance policy.
1) Flexible premiums
With a VUL plan, a policyholder has the decision of putting in more than the regular dividend. Any amount above the regular premium becomes added investment or top-up. In effect, the fund value accrues faster for the policyholder. This is exceptional for those who want to invest their extra income. On the contrary, in the event of sudden financial trouble, a VUL plan enables the policyholder to pay the charges only, thereby keeping the policy in force. Moreover, as long as there is enough fund value to cover the fees, a VUL policy will not terminate.
2) Potential higher returns
Considering the underlying assets are linked to stocks and bonds, the gains of the VUL plan –may outperform the other types of insurance policies. Contrary to that, the profits and growth rate are now down to just four percent. And with the existing economic conditions, all indications point to even lower rates in the future.
Although a VUL plan involves more significant risk, the higher returns allow the policyholder to accomplish his goals faster. Or better yet, gain a more considerable fund than he initially set out for.
A VUL policyholder can use the fund value in case of financial emergency. Unlike in old policies, this is treated as a withdrawal rather than a trust. Thus, the amount withdrawn does not acquire any interest. Better yet, the amount withdrawn is not subtracted from the face amount. However, it is highly encouraged that whatever amount was taken out to be reinvested so that the policyholder continues with his financial goals.