What Is Variable Universal Life Insurance?
Like traditional universal life, variable universal life (VUL) provides low cost permanent insurance with a side fund that accumulates cash values that grow tax deferred. Additionally, variable universal life offers flexible premiums and death benefits as well as the tax advantages normally associated with permanent life insurance.

The major difference with variable universal life is that the policyholder has the option to “invest” policy cash values in equities based funds called sub accounts. Sub accounts are very similar to mutual funds in that each consists of a number of companies that are categorized by market size or fund objective. Each variable universal life policy offers a mix of sub accounts with different asset mixes from which to choose. VUL account options may include money market funds, growth funds, indexed funds, bond funds, international funds, small cap funds, and a fixed account option. Policyholders have the option to manage their cash values and investment choices by switching allocations among the equity fund accounts.

The actual policy cash values will depend upon the returns of the underlying equity fund accounts. There are no cash value guarantees with variable universal life. Therefore, if the equity funds lose 30% in a given year, policy cash values will be reduced by 30%. On the other hand, if the equity funds increase by 30%, policy cash values will increase by 30%.Variable universal life insurance policies are for individuals who want to maintain maximum control over their life insurance policy but understand the volatility associated with the up and down nature of the equities markets.

Because variable universal life insurance policies offer equity based investments, they fall under the definition of a security and must be registered with the state and with the Securities and Exchange Commission (SEC)(1). Furthermore, agents and representatives that offer variable universal life insurance are required to be registered with the National Association of Securities Dealers (NASD). By law, when presenting VUL products, all registered representatives must provide a prospectus of the entire policy including fees, expenses, sales charges and investment accounts to the prospect at the initial interview.

Variable UL policies should be considered only in instances where the policyholder understands the underlying investment risks and is willing to accept those risks for the opportunity to have more policy control and potentially higher cash values. 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. For more information, see "How a Variable Universal Life Insurance Policy Works".

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