Variable Universal Life Insurance
Variable Universal Life Insurance (VUL) is a permanent life insurance plan that offers flexible premium payments, death benefit choices, and cash values through many different investment options. VULs usually can provide a better alternative to Return of Premium (ROP) term plans, and is the professional solution to the ‘buy term and invest the difference’ concept. VULs are registered with the Securities Exchange Commission (SEC) and must be sold by Registered Representatives. They provide the same tax favored status as traditional universal life products, but unlike traditional UL plans, VUL products go beyond the limitations of short-term interest investments by offering a full array of risk and return. After all, if the buyer is not willing to take on significant market risk, then they probably should buy a traditional permanent life insurance plan and not a VUL or a term product and invest in moderate to aggressive mutual fund accounts.
Like all permanent life insurance plans, VULs are subject to TEFRA (1982), DEFRA (1984), and TAMRA (1988); along with the Guideline Premium Test (GPT), the ‘7-year pay’ test, and Cash Value Accumulation Test (CVAT). Moreover, because VULs are registered products, the licensed registered representative must provide the potential buyer with a prospectus – a document (filed with the SEC) which describes the security investment with portfolio summaries, information on fees and expenses, past performance figures, and other investor information. Additionally, the prospectus will tell the potential buyer that ‘past performance is not necessarily an indication of how the Portfolio will perform in the future.’ Thus, policyowners are to consider the investment objectives, risks, and charges and expenses of the product before investing in a VUL.
- FLEXIBLE PREMIUMS:
There are various VUL plans available; however, in general the premium options for VUL policies include a minimum premium, a target premium, a scheduled or planned premium, a guideline premium, and a MEC (Modified Endowment Contract) premium, which is the maximum allowable premium for 6 of 7 years without losing FIFO status. In the early years of the policy, the premiums are lower like that of term plans. These give the owner the option of paying lower premiums or paying guideline or MEC premiums and seek to build up cash values quicker. The excess portion of the payments, the amount over the cost of insurance, is put into one or more selected accounts – typically mutual fund type accounts with objectives from conservative to very aggressive.
- PROTECTION AND NON-FORFEITURE VALUES:
In many states life insurance policies and their values are protected from creditors. By law, in every state of the US, life insurance policies have non-forfeiture values. They will be listed near the front of your policy. The NAIC (National Association of Insurance Commissioners) Standard Nonforfeiture Law for Life Insurance is a guideline used by most states. Nonforfeiture values in a life insurance policy are values protected by law that cannot be forfeited even if the policyowner ceases to pay the premiums. These benefits include: cash surrender value, loan value, paid-up insurance, and extended term insurance.
- DEATH BENEFIT OPTIONS:
Most VUL plans offer flexible death benefit options. They offer a level death benefit which allows the cash values more accumulation because fewer premiums are required to pay for the death benefit. However, for clients wanting an increasing death benefit, they can choose that option, and a larger portion of their premiums will be used to potentially increase the death benefit each year.
- TAX-FREE WITHDRAWALS AND DEATH BENEFITS:
The death benefit is guaranteed to never be less than the face amount of the policy less any policy loans and interest. However, most modern whole life policies, in which the dividends are placed into the policy, will have scheduled death benefits that may increase as much as two or three times the initial face amount. Additionally, the portion of any cash withdrawal is normally tax-free until the withdrawal exceeds the premiums paid into the policy. And unless the estate is named beneficiary, normally the death benefit of a life insurance plan is tax-free.
Most life insurance policies have riders or additional available amendments to the standard policy contract. A rider is an amendment or endorsement to an insurance policy, which for an extra premium gives the policyowner extra benefits or options. Examples include children insurance riders, living benefits, coverage for other insureds, accidental death benefit, term riders, and waiver of premium. Many VULs also offer a ‘no-lapse’ rider for a certain number of years.
- FOR MORE INFORMATION (see the following articles):
Permanent Life Insurance – This link explains the nature of permanent or cash value life insurance plans.
Advantages & Disadvantages of Universal Life Insurance – This link addresses the most important advantages and disadvantages to universal life insurance plans.
What policy should I buy? – This link may help you decide which life insurance product is the best for you.