Variable Universal Life Insurance: An Option for Young Investors

If you have a reasonably good understanding of the way the stock market works and would like to have an active role in controlling the investments made for your life insurance, a variable universal life insurance policy is worth considering.
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Life Insurance in General
In general permanent life insurance, like any other kind of insurance, is a financial instrument in which you pay a premium which a company invests in a portfolio of investments. When you buy whole life insurance, the risk is all on the backs of the company. All you have to do is keep up with your premium, and the company guarantees payment of the face value of the policy whenever you die.

A universal policy is still mostly at the risk of the company, although you do share some of the risk. The universal policy is based on the interest rates and on the fact that your cost of insurance is less in early years. Thus, even though the company would have to pay the entire face amount if you die young, since the odds of that are relatively slim, first years' premium will go a long way toward building a solid cash value; of course, that's assuming you pay more than just the minimum premium. The risk for you is primarily in the interest rates. If interest rates decrease, you may have to increase your premium to keep from exhausting your cash value on the cost of insurance which increases as you get older. The policy is flexible, however; so if it became necessary to increase your payment beyond your budget, you could simply lower the face value, eliminate riders, and so forth.

Variable Universal Life
A Variable Universal Life policy (VUL) is not available with all companies as the agents have to have a general securities license in order to sell this type of policy. Because of the ability on the part of the owner to invest in a variety of equity funds, VUL also has to be registered with the SEC and sold with a prospectus. As you might suspect, it is usually more expensive than regular universal life, but the benefits can be worth the additional cost.

VUL combines some of the features of both whole life and universal life and adds an investment component. A VUL usually has a permanent life insurance component which guarantees that a beneficiary will receive minimum benefit as long as there is enough cash value in the accumulation account to pay the cost of insurance.

The biggest difference between a VUL and a UL is that the risk of the investments is born by the policy owner. You invest the cash value in a variety of funds available through the company. These funds are much like mutual funds, but are treated somewhat differently for tax purposes. They usually range from the ultra-conservative to the highly speculative and can realize substantial growth. These funds grow tax-free and can be accessed by borrowing against them.

The downside of the VUL is that if the funds in which you choose to invest perform purely, you can lose your entire investment. For this reason, most companies guarantee a minimum payout on the death benefit as long as a minimum premium is paid.

While market volatility makes the VUL a poor choice for a senior who can't afford to lose any investments, it can be a very attractive way to build a legacy, shelter an estate from taxes, and help fund your retirement.