Variable Universal Life Insurance: A Flexible Fit for Long Term Needs
Some clients are looking to do more with their premiums than merely financing their family’s needs should tragedy strike. They are looking to use their premiums to earn money for retirement while maintaining the peace of mind the death benefit provides. While permanent life insurance policies provide a cash value accumulation vehicle and share some similarities, the way they invest the premiums is markedly different. Between Whole Universal Life, Indexed Universal Life, and Variable Universal Life(VUL), VUL takes the most risk and offers the opportunity for the most reward. The flexibility of VUL alongside the opportunity for substantial growth can it a great fit for the long term needs of your more courageous clients.
A Variable Universal Life Policy is a Cash Value Policy
Let’s start by understanding what VUL shares with other permanent and cash value policies. As always, a policyholder may:
- Use money from the cash value to pay for premiums
- Obtain a tax-free loan up to the amount that they have contributed to the policy at that point in time,
- Withdraw tax-free, partial funds from the cash account
- Enjoy tax-deferred growth of the cash value account
The flexibility of any cash value policy is an excellent selling point as they all allow for the withdrawal of money in the account during the actual lifetime of the policyholder. This aids in retirement planning, budgeting for children’s college tuition, and other expenses down the road.
Where a VUL veers from other cash value policies is in how it invests the cash.
Live and Die by the Market: Risks and Returns
A VUL differs from, say, an Indexed Universal Life policy because it does not guarantee a return or net-zero should the market index take a turn for the worse. Where an Indexed Life policy is not investing in actual stocks and mutual funds but rather tracking the market from a subaccount, a Variable Life policy invests the money directly into the market. The cash value is tied to actual stocks and funds and if they underperform, the cash value will diminish. That’s the downside. However, a VUL is a ‘feast and famine’ proposition.
The upside is that if the market does well the cash value will not be artificially limited by caps or participation rates associated with Indexed policies. If the market roars, the cash value roars along with it.
Which Clients Are A Good Fit for a VUL Policy?
The answer to this question depends on a few factors. If a client is risk-averse and prefers a more conservative cash policy then a VUL would not be a comfortable fit as it doesn’t protect the investment from the downside. If the client is interested in all the benefits that cash value policies hold from a tax and retirement planning perspective but wants to play the money along with the market unhindered, then a VUL is excellent.
One caveat to this would be that a client must be able to pay the premiums regardless of how the investment performs. A lapsed policy is dead money to the client. Providing the best client service means finding the policy that meets the client’s needs without sacrificing the client’s investment over time.
Take the time to utilize the resources and team at Trust Financial to gain a comprehensive understanding of how Variable Universal Life policies work and which clients they would best serve.