Understanding Variable Universal Life (VUL) insurance: A guide for insurance professionals

Offering life insurance to your clients helps to build trust, establish long-term relationships, and helps you diversify product offerings and revenue streams. It not only provides a financial safety net for clients’ families, but also serves as a tool for long-term financial planning. Life insurance can secure the policyholder’s family’s financial future, covering everything from daily living expenses to children’s education and mortgage payments, ensuring their lifestyle is maintained even after they’re gone. Selling life insurance can be a sensitive topic for some clients so it’s important to understand the financial priorities, goals, and concerns of clients and personalize offerings to meet their needs.

With a unique combination of benefits to meet client needs, Variable Universal Life (VUL) insurance is a valuable protection offering to share. It allows financial professionals to offer a tailored solution that can adapt to a client’s changing financial landscape and offers the dual benefits of a death benefit and investment growth potential. Financial professionals who are knowledgeable about VUL can expertly guide clients through complex financial planning decisions, ensuring that life insurance strategies are not only aligned with clients’ immediate needs but also their long-term financial objectives.

What is Variable Universal Life Insurance?

VUL insurance is a type of permanent life insurance policy that combines the protection of traditional life insurance with the investment element of a securities account. Policyholders have the flexibility to adjust their premiums and death benefits, while a portion of the premiums can be invested in an array of sub-accounts offering potential for growth. These sub-accounts function similarly to mutual funds and can vary in their level of risk and return, giving policyholders the opportunity to align their life insurance with their financial goals and risk tolerance.

Comparing VUL to other life insurance products

VUL differs from traditional whole life insurance in that it does not guarantee a fixed death benefit or premium amount. Instead, the policyholder has the option to adjust the premiums and death benefits to suit their changing needs. Additionally, VUL policies offer investment growth potential, while traditional whole life policies have a guaranteed cash value.

Compared to term life insurance, VUL offers permanent coverage rather than coverage for a specific time period. It also has the added benefit of investment potential, whereas term life insurance does not accumulate cash value.

Indexed Universal Life (IUL) insurance, like VUL combines a death benefit with investment potential, but they differ significantly in their investment growth and risk management approaches. IUL policies tie cash value growth to a stock market index, like the S&P 500, offering growth potential with protection against market downturns through a guaranteed minimum interest rate. This structure allows for growth opportunities while shielding the cash value from market losses. On the other hand, VUL policies have more direct exposure to investment markets through sub-accounts similar to mutual funds, potentially yielding higher returns but with increased risk due to cash value fluctuations with market performance. Both policy types provide flexibility and investment potential, tailored to different risk tolerances and financial planning objectives.

How Variable Universal Life insurance works

Policy premiums in VUL insurance are notable for their flexibility, which is one of the hallmarks of this type of policy. Unlike more traditional life insurance policies with rigid payment structures, VUL allows policyholders to adjust their premiums within certain limits. This means that after the payment of minimum premiums to keep the policy in force, policyholders can pay more to increase the policy’s cash value or pay less if personal financial circumstances dictate the need to do so. Excess payments above the cost of insurance and administrative fees are allocated to investment accounts, potentially increasing the policy’s value. However, it’s important to manage these premiums carefully, as insufficient funding could cause the policy to lapse, while overfunding can have tax implications. This ability to modulate premium payments gives clients considerable control over their life insurance policy, enabling it to better fit within the ebb and flow of their financial life.

Understanding the death benefit of VUL

The death benefit aspect of VUL is a central feature that distinguishes it from other investment vehicles. Upon the death of the policyholder, the policy pays out a death benefit to the designated beneficiaries. This benefit can be largely unaffected by the performance of the policy’s investment accounts, provided that the policy premiums have been managed properly to maintain adequate funding for the death benefit. Additionally, policyholders can often choose between a fixed death benefit or a variable one, which includes the account value of the investment component. Hence, the death benefit can potentially grow over time if the investments perform well, which can result in a larger payout for the beneficiaries. However, if investments underperform, there is usually a guaranteed minimum death benefit, ensuring that recipients are safeguarded to a certain extent from investment risk. The death benefit paid out from a Variable Universal Life (VUL) insurance policy is generally tax-free, offering beneficiaries a significant financial advantage and ensuring the full value of the benefit goes directly to them without federal income tax deductions.

Understanding the investment component of VUL

The cash value of a VUL insurance policy is a distinctive feature that allows for the accumulation of wealth within the policy. Portions of the premiums paid above the cost of insurance and administrative fees are allocated to the policy’s cash value account, where they can be invested in a range of sub-account options. These sub-accounts are similar to mutual funds and encompass various asset classes and investment styles, offering policyholders the opportunity to choose based on their risk tolerance and investment goals.

As the investments in these sub-accounts potentially grow, so does the cash value of the policy, which can then be used in various ways. The policyholder may borrow against the cash value, use it to pay premiums, or even withdraw it for personal use, subject to potential tax implications. Withdrawals from the cash value of a life insurance policy are tax-free above the amount paid, offering a unique advantage for policyholders seeking access to funds with minimal tax implications. However, it is vital to maintain a sufficient level of cash value to support the death benefit of the policy, and poor investment performance or inopportune withdrawals can impact the policy’s ability to remain in force.

Customization options and benefits for policyholders in VUL insurance

One of the definitive advantages of VUL insurance lies in the extensive customization options available to policyholders. Besides the choice of determining the amount and frequency of premium payments, policyholders can tailor their VUL policy to their specific financial needs and goals in several ways.

Investment growth potential

For starters, the option to select the investment sub-accounts for their cash value allows for a personalization of the investment component of their insurance. Policyholders can choose from a diverse range of sub-account options varying in asset classes and levels of risk, aligning their choices with their risk tolerance and investment strategy. This means that investments can be conservative, aggressive, or a mix, depending on the individual’s financial objectives and market outlook.

Additionally, the ability to adjust the death benefit provides another layer of flexibility. Policyholders can opt for a level death benefit, which remains constant throughout the policy, or a variable death benefit, which can increase over time if the investment component performs well, potentially offering beneficiaries a larger payout.

Fund transfers between sub-accounts are typically permitted, allowing policyholders to react to changing market conditions or life circumstances and adjust their investment strategies accordingly. These personalized adjustments can be made to optimize the policy for growth, to address financial needs, or even to take into account changes in the policyholders’ life, such as marriage, the birth of children, or retirement planning.

Tax advantages

VUL insurance policies offer several tax advantages that can be beneficial to policyholders. One substantial benefit is the tax-deferred accumulation of cash value. The investment gains in the sub-accounts grow tax-free until withdrawal, allowing for potentially higher returns due to the compound growth effect. Furthermore, if structured properly, policyholders may access the cash value through policy loans which are tax-free. This is because loans are not considered taxable income, given that they are eventually repaid from the death benefit. Additionally, the death benefit itself is typically paid out tax-free to beneficiaries, providing a potentially significant financial advantage to the policyholder’s heirs. It is these tax benefits that make VUL policies an attractive component of a comprehensive financial plan, balancing the need for life insurance with the desire for a tax-advantaged investment strategy.

Selling and marketing VUL policies

Insurance professionals have a critical role in guiding clients through the intricate landscape of life insurance options.¹ As markets evolve and clients’ needs become more complex, understanding the nuances of VUL insurance will empower you to offer tailored, insightful advice that can profoundly impact your clients’ financial well-being.

Ideal candidates for VUL insurance

Clients who may benefit from a VUL policy are those with a long-term perspective who seek the dual benefits of life insurance protection and investment growth potential. These clients are typically financially savvy individuals who have maximized contributions to other tax-advantaged accounts, like 401(k)s and IRAs, and are looking for additional tax-deferred growth opportunities. They should have a stable and sufficient income that allows them to manage the flexibility of VUL premiums and are comfortable with the inherent risks associated with the investment component. This demographic might include high-income earners, business owners, or families with a need for both life insurance and the potential for cash value accumulation to fund future financial goals such as education expenses or retirement planning.

Tips for selling Variable Universal Life insurance to clients

1. Educate on flexibility and control: Clients value financial products that can adapt to their changing life circumstances. Financial professionals should emphasize the flexibility in premium payments and coverage adjustments that VUL policies offer. Use examples to illustrate how policyholders can adjust their premium payments and choose their investment options based on personal financial goals, risk tolerance, and changing market conditions.
2. Highlight tax advantages: An educated client is more inclined to see the value in a financial product. Financial professionals should explain the tax benefits of VUL, such as tax-deferred growth on the cash value, tax-free loans, and the potential for tax-free distribution of the death benefit. It’s important to detail how these advantages can play a vital role in a client’s long-term financial planning, estate planning, and retirement strategies.
3. Showcase investment potential while managing risk: Financial professionals should present the investment aspect of VUL insurance as an attractive feature while also ensuring clients understand the risks. Comparing the VUL’s investment options to mutual funds can help clients grasp how they can participate in the market’s growth potential. Financial professionals should also discuss strategies to manage investment risk, such as choosing a diverse range of sub-account options and regularly reviewing and adjusting the policy’s investment component.

Nationwide’s resources

To help clients navigate steps to protect and plan for their financial future, explore our life insurance resources, including product guides for both you and your clients.