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by: Zeus Design


 

Universal Life Insurance

How a Variable Universal Life Policy Works

Variable universal life (VUL) insurance works very similar to traditional universal life insurance with the exception that a variable policy allows an individual to allocate excess premium payments to investment accounts similar to mutual funds. A variable universal life policy has a fixed interest rate component as well as several investment account options that offer the potential for higher returns. However, along with the potential for higher returns comes the risk of loss of cash value which may negatively affect the life insurance protection over the long run. (1)


VUL Policy Costs

As with most universal life policies, when the VUL policyholder makes a premium payment, the insurance company first deducts a premium load. The premium load is a combination of a premium expense charge plus a premium tax charge and can range anywhere from 3-7% of the total premium depending on the insurance company. After the premium load is deducted, the balance of the premium payment is deposited into the accumulation account. The accumulation account earns fixed interest at a current prevailing rate with a minimum guaranteed rate of generally 2-3% annually. On each monthly policy anniversary, deductions are taken from the accumulation account for administration charges, expense charges, and costs for insurance including riders. For more information on policy features and costs with universal life insurance, see "How a Universal Life Insurance Policy Works".


VUL Premium Payments

VUL insurance premiums are flexible and may be increased or decreased depending on the policy owner’s objectives. The policy owner has the option of paying the minimum premium required to cover policy costs or pay a higher premium to grow cash values. As long as there is sufficient cash value in the policy, premiums may even be temporarily discontinued. If the cash value is insufficient to cover policy costs and insurance charges, the policy premium must be increased. If the premium payment does not cover policy expenses and insurance charges, and there is no cash value available to meet these costs, the policy will lapse. With VUL policies, investment performance can have a huge impact on policy premium requirements.


VUL Sub Account Choices

Each variable universal life policy offers abroad variety of sub accounts with different asset mixes from which to choose. Most policies have 10-20 account options that include varying degrees of risk. Furthermore, policy owners can manage their cash values and investment choices by switching allocations among the equity fund accounts at their discretion. Because most of these sub account funds are professionally managed, VUL policies have significant operating costs and management fees. Similar to mutual funds, these fees and expenses are assessed against the separate accounts and will vary based on the type of fund.

VUL Investment Experience

The performance of a variable universal life policy is directly related to the investment returns of the underlying separate account funds or the fixed account if cash values are allocated there. There are no cash value guarantees for the separate account funds. If cash values are reduced by poor investment returns, additional premium payments will likely be required to maintain the insurance protection. If premium payments are not increased, the policy may lapse due to poor performance.

Variable universal life insurance policies are for sophisticated investors only. Before considering a VUL you must understand the volatility of the equities markets and make sure the policy is suitable for your needs. With VUL, when the investment sub accounts are rising, the insurance policy generally performs very well. However, if the investments perform poorly, the life insurance policy performs poorly and may impact the long term status of the policy.

Access to Policy Cash Values

Variable universal life insurance treats surrenders, withdrawals and policy loans in the same fashion as traditional universal life policies. To see a specific explanation of how these features can be used to access policy cash values see, "How a Universal Life Insurance Policy Works": Surrender Charges, Withdrawals and Policy Loans.

Additionally, VUL policies offer all of the tax advantages of permanent life insurance. For more information on taxes and life insurance see, "Life Insurance Tax Advantages".

VUL Transfers Risk

Variable universal life policies transfer policy risk of cash value growth from the insurance company to the policy owner. With VUL’s, the policy holder will be ultimately responsible for selecting the equity funds that grow the cash value. If the funds achieve good returns, a VUL policy may significantly outperform traditional permanent insurance policies. However, if the equity funds lose value, policy cash value can be exhausted leaving no funds available to pay insurance costs and policy expenses.

Variable universal life is considered a security under federal law and is subject to the regulations of the Securities and Exchange Commission (SEC) and the National Association of Securities Dealers (NASD). They may be presented for sale by licensed representatives only. A prospectus describing the complete policy must be provided by the licensed representative when selling variable universal life insurance.

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(1) Material above is provided for informational purposes only. Neither Meg Financial, Inc nor Michael E. Gray, Jr. is a licensed registered representative of the NASD. Therefore, we do not offer direct investment advice for any security or securities related products. All of the quotes provided are provided by third party affiliates who are licensed as insurance agents in your state as well as with the National Association of Securities Dealers (NASD).
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