VUL Guide: Understanding Variable Life Insurance (2025)

Life insurance often brings to mind straightforward term policies or traditional whole life. But the insurance landscape offers more complex options designed for specific financial goals. One such product is variable universal life insurance, often shortened to VUL. Understanding what VUL is, how it works, its potential benefits, and significant risks is crucial before considering it as part of your financial strategy. This guide, updated for 2025, aims to demystify variable universal life insurance.

Navigating complex insurance products like VUL can feel overwhelming. That’s where having a dedicated, knowledgeable guide makes all the difference. At Insurance By Heroes, we understand the importance of service and trust – principles ingrained in our foundation. Founded by a former first responder and military spouse, our team comprises professionals with backgrounds in public service. We bring that same dedication to helping you find the right insurance solutions. As an independent agency, we aren’t tied to any single carrier. Instead, we partner with dozens of top-rated insurance companies, allowing us to shop the market and tailor coverage specifically to your unique needs and financial situation. Understanding products like variable universal life insurance requires careful consideration, and comparing options across different insurers is key – a service we provide to ensure you get a suitable fit.

What is Variable Universal Life Insurance (VUL)?

Variable Universal Life (VUL) insurance is a type of permanent life insurance policy with a built-in savings component, known as cash value. What distinguishes VUL from other permanent policies like whole life or standard universal life is that the policyholder can invest the cash value portion in various separate accounts, often similar to mutual funds. These accounts hold stocks, bonds, or other securities.

Key characteristics define VUL:

• Permanent Coverage: Like other permanent policies, VUL is designed to provide coverage for your entire life, as long as premiums are paid and the policy doesn’t lapse.
• Flexible Premiums: Within certain limits, policyholders often have flexibility in the amount and frequency of premium payments after the initial payment. However, insufficient payments can cause the policy to lapse.
• Cash Value Growth Potential: The cash value can grow based on the performance of the chosen investment subaccounts. This offers the potential for higher returns compared to traditional whole life policies, where growth is typically based on declared dividend rates or interest.
• Investment Risk: Crucially, the policyholder bears the investment risk. If the chosen subaccounts perform poorly, the cash value can decrease, potentially even falling to zero. This could require higher premium payments to keep the death benefit intact or even lead to policy lapse.
• Death Benefit: VUL policies provide a death benefit to beneficiaries upon the insured’s death. This death benefit can sometimes be structured to increase with cash value growth (Option B/Option 2) or remain level (Option A/Option 1), depending on the policy design and options chosen.

It’s vital to understand that VUL insurance is considered a security product due to its investment component. This means it’s regulated by both state insurance departments and the Securities and Exchange Commission (SEC) and sold via a prospectus, which details the policy’s fees, risks, investment options, and other important information.

How Does Variable Universal Life Insurance Work?

Understanding the mechanics of VUL involves looking at its core components: premiums, fees, cash value, investment subaccounts, and the death benefit.

Premiums and Fees

When you pay a premium for a VUL policy, it doesn’t all go directly into the cash value or towards the pure cost of insurance. Several fees and charges are deducted first. These can significantly impact your policy’s performance and include:

• Sales Loads: Charges deducted from premiums to cover sales commissions and distribution costs.
• Cost of Insurance (COI): The charge for the pure life insurance protection. This generally increases as the insured gets older.
• Administrative Fees: Flat fees or percentages charged for policy administration and maintenance.
• Mortality and Expense (M&E) Risk Charges: Compensate the insurer for certain risks they assume under the policy.
• Investment Management Fees: Fees associated with the underlying investment subaccounts, similar to mutual fund expense ratios.
• Surrender Charges: Fees imposed if you surrender (cancel) the policy, especially within the early years. These typically decrease over time.
• Rider Charges: Costs for any optional benefits added to the policy (e.g., waiver of premium, accidental death benefit).

The complexity and variability of these fees across different insurance carriers underscore why working with an independent agency like Insurance By Heroes is so beneficial. We can help you compare the fee structures of VUL policies from various companies to understand the true cost and potential impact on your cash value growth. Not every policy’s fee structure is right for every person’s financial plan.

Cash Value and Investment Subaccounts

After fees are deducted, the remaining portion of your premium is allocated to the policy’s cash value. You, the policyholder, direct how this cash value is invested among the available subaccounts. These subaccounts typically offer a range of investment objectives and risk levels, such as:

• Equity funds (large-cap, small-cap, international)
• Bond funds (government, corporate, high-yield)
• Money market funds
• Balanced funds (a mix of stocks and bonds)
• Specialty or sector funds

The value of your cash account fluctuates daily based on the performance of these chosen investments, net of fees. You can typically transfer funds between subaccounts, although restrictions or fees might apply.

Death Benefit Options

VUL policies usually offer two main death benefit options:

• Option A (Level Death Benefit): The death benefit remains level. As the cash value grows, the net amount at risk (the difference between the death benefit and the cash value) for the insurance company decreases. This generally results in lower insurance costs over time compared to Option B, assuming positive investment performance.
• Option B (Increasing Death Benefit): The death benefit equals the specified face amount plus the policy’s cash value. This means the beneficiaries receive both amounts. While this offers a potentially larger payout, the cost of insurance charges will be higher because the net amount at risk for the insurer remains constant (the face amount).

The choice between Option A and Option B depends on your goals – maximizing potential cash accumulation (often favoring Option A due to lower costs) or maximizing the potential death benefit payout (Option B).

Policy Loans and Withdrawals

Like other permanent life insurance policies, VUL policies allow access to the cash value through loans or withdrawals.

• Loans: You can typically borrow against the cash value, usually tax-free. The loan accrues interest. An outstanding loan balance plus accrued interest will reduce the death benefit if the insured dies before repayment. If the loan balance exceeds the cash value (which can happen if investment performance is poor and/or interest accrues), the policy could lapse if additional premiums aren’t paid.
• Withdrawals: You can withdraw portions of the cash value. Withdrawals up to the policy basis (total premiums paid) are generally tax-free. Withdrawals exceeding the basis are typically taxed as ordinary income. Withdrawals will reduce the cash value and may also reduce the death benefit.

Accessing cash value should be done cautiously, considering potential tax implications and the impact on the policy’s longevity and death benefit.

Potential Benefits of Variable Universal Life Insurance

VUL insurance can offer several advantages for the right individuals:

• Potential for Higher Cash Value Growth: Compared to traditional whole life or guaranteed universal life, the ability to invest in market-linked subaccounts offers the potential for greater long-term cash value accumulation, although this comes with risk.
• Tax-Deferred Growth: The cash value grows on a tax-deferred basis. You don’t pay taxes on the investment gains within the policy each year.
• Flexible Premiums: The ability to adjust premium payments (within limits) provides flexibility for changing financial circumstances.
• Tax-Free Death Benefit: The death benefit paid to beneficiaries is generally received income tax-free.
• Access to Cash Value: The ability to access funds via loans or withdrawals provides liquidity.
• Estate Planning Tool: The death benefit can provide liquidity for estate taxes or help transfer wealth efficiently.

These benefits sound appealing, but they must be weighed against the inherent risks and costs. Not every carrier offers the same subaccount options or policy features. Insurance By Heroes helps clients compare these features across dozens of insurers to find a policy structure that aligns with their risk tolerance and growth expectations.

Risks and Considerations of VUL Insurance

Variable universal life insurance is not without significant risks and complexities:

• Investment Risk: This is the primary risk. Poor performance in the chosen subaccounts can lead to a decrease in cash value. In severe cases, this could require significantly higher premiums to prevent the policy from lapsing, potentially negating the “flexible premium” benefit.
• Policy Lapse Risk: If the cash value falls too low due to poor investment returns or insufficient premium payments, the policy could lapse, resulting in the loss of coverage and potentially triggering tax consequences if there were outstanding loans or gains.
• Complexity: VUL policies are complex instruments involving insurance and investment components. Understanding the fee structure, investment options, and policy mechanics requires careful study of the prospectus.
• Fees and Charges: As detailed earlier, VUL policies have numerous internal fees and charges that can erode returns, especially if investment performance is modest or negative. These fees vary significantly between insurance companies.
• Market Volatility: The cash value is directly exposed to market fluctuations. Downturns can significantly impact policy values.
• Requires Active Management: Unlike traditional whole life, VUL requires the policyholder to make investment decisions and monitor performance.
• Surrender Charges: Accessing the full cash value early on can be expensive due to surrender charges.

Given these risks, VUL is generally considered suitable only for individuals with a higher risk tolerance, a long-term investment horizon, and a clear understanding of how the policy works. It’s essential to compare policies meticulously. An independent agency like Insurance By Heroes, staffed by professionals dedicated to service – many with public service backgrounds themselves – can provide invaluable assistance. We aren’t pushing one company’s product; we’re finding the policy, potentially from dozens of options, that makes sense for *you*, considering both the potential rewards and the very real risks involved in variable life insurance.

Who Might Consider Variable Universal Life Insurance?

VUL insurance isn’t a one-size-fits-all solution. It might be appropriate for certain individuals in specific circumstances:

• High-Net-Worth Individuals: Those seeking tax-advantaged investment growth and estate planning tools, who have already maximized contributions to traditional retirement accounts (like 401(k)s and IRAs).
• Individuals with a Long-Term Horizon: The potential benefits of market growth and the impact of fees often require a long holding period (decades) to be fully realized.
• Those with Higher Risk Tolerance: Individuals comfortable with market fluctuations and the possibility that their cash value could decline.
• Disciplined Investors: Policyholders who understand the need to potentially pay higher premiums if investment performance lags and who will actively monitor their policy.
• People Seeking Premium Flexibility: Those who need the ability to adjust premium payments over time, while understanding the risks associated with underfunding the policy.

Conversely, VUL is likely **not** suitable for:

• Individuals seeking guaranteed cash value growth or guaranteed premiums.
• Those with a low tolerance for investment risk.
• People needing short-term access to their funds (due to surrender charges).
• Individuals who may struggle to pay potentially higher premiums if investments underperform.
• Those looking for a simple, set-it-and-forget-it life insurance policy.

Determining suitability requires a thorough analysis of your financial situation, goals, and risk tolerance. This is where personalized advice becomes critical. Insurance By Heroes was founded on the principle of serving others, a value shared by our team members who come from service-oriented backgrounds. We apply this by taking the time to understand your specific needs before recommending any product, especially something as complex as variable universal life insurance. We’ll explore if VUL aligns with your objectives or if other solutions from the wide array of carriers we work with might be a better fit.

Comparing VUL Policies: Why an Independent Agent Matters

If you’re considering investing in variable life insurance, comparing policies from different carriers is not just recommended – it’s essential. VUL policies can vary significantly in several key areas:

• Fee Structures: Premium loads, M&E charges, administrative fees, COI rates, and surrender charge schedules can differ substantially. Lower fees generally mean more of your premium works for you.
• Investment Subaccount Options: The number, type, quality, and expense ratios of available subaccounts vary widely. Some insurers offer proprietary funds, while others offer funds from well-known third-party managers.
• Policy Loan Provisions: Interest rates charged on loans (fixed or variable) and crediting rates on loaned amounts can differ, affecting the net cost of borrowing.
• Rider Availability and Cost: Optional riders (like long-term care riders, waiver of premium, guaranteed minimum death benefit riders) and their costs will vary by company.
• Insurer Financial Strength: While the cash value performance depends on subaccounts, the insurer’s financial stability is still crucial for the guaranteed death benefit component and the company’s ability to meet its long-term obligations.
• Illustrations and Projections: How companies illustrate potential policy performance can differ. Understanding the assumptions behind illustrations (e.g., assumed rates of return, impact of fees) is vital. Remember, illustrations are not guarantees.

This is precisely why working with an independent agency like Insurance By Heroes offers a distinct advantage. We aren’t limited to the products of a single company. Our access to dozens of top-rated carriers allows us to:

• Objectively compare VUL policy features, fees, and investment options side-by-side.
• Identify policies with subaccount choices that align with your investment strategy and risk tolerance.
• Analyze illustrations to understand the potential outcomes under different scenarios.
• Help you find a policy that offers a competitive balance of cost, features, and potential performance based on *your* needs, not the needs of a particular insurance company.

Our background in service means we prioritize your best interests, guiding you through the complexities and ensuring you understand the product you are considering.

Regulation and Disclosure

Because VUL combines insurance with securities, it falls under a dual regulatory framework:

• State Insurance Departments: Regulate the insurance aspects, including policy provisions, reserves, and insurer solvency.
• Securities and Exchange Commission (SEC) & Financial Industry Regulatory Authority (FINRA): Regulate the investment aspects. VUL policies must be registered with the SEC and sold with a prospectus. Financial professionals selling VUL must typically hold both insurance licenses and securities registrations (like Series 6 or Series 7).

The **prospectus** is a critical document. It contains detailed information about:

• All fees and charges.
• Investment objectives, strategies, and risks of each subaccount.
• Death benefit options.
• Policy features, including loans and withdrawals.
• Tax information.
• Potential risks, including policy lapse.

Anyone considering VUL should read the prospectus carefully before investing. It provides the legally required disclosures needed to make an informed decision.

Alternatives to Variable Universal Life Insurance

If the risks and complexity of VUL seem daunting, or if your needs are different, several alternatives exist:

• Term Life Insurance: Provides pure death benefit protection for a specific period (e.g., 10, 20, 30 years). It’s typically much less expensive than permanent insurance and has no cash value component. Often suitable for covering temporary needs like mortgages or income replacement during working years.
• Whole Life Insurance: Offers permanent coverage with guaranteed premiums, a guaranteed death benefit, and guaranteed cash value growth (though the growth rate is typically conservative). Less risky but offers lower growth potential than VUL.
• Guaranteed Universal Life (GUL): A type of universal life focused on providing a guaranteed death benefit at a lower cost than whole life, often with minimal cash value accumulation. Suitable for those prioritizing lifelong coverage over cash growth.
• Indexed Universal Life (IUL): Another type of universal life where cash value growth is linked to the performance of a market index (like the S&P 500), but with downside protection (a floor, often 0%) and usually a cap on potential gains. Offers potentially higher returns than whole life but generally lower potential (and less direct market risk) than VUL.
• Buying Term and Investing the Difference: A strategy where you buy less expensive term insurance and invest the premium difference yourself in mutual funds, ETFs, or other investments. This provides transparency and control but lacks the tax advantages (tax-deferred growth, tax-free death benefit) of cash value life insurance.

Choosing the right type of life insurance depends entirely on your individual circumstances, budget, risk tolerance, and financial goals. Again, the advantage of Insurance By Heroes lies in our independence. We can explore all these options with you, drawing from the diverse product portfolios of numerous carriers to find the strategy – whether it involves variable universal life insurance or another approach entirely – that truly serves your needs.

Conclusion: Making an Informed Decision About VUL

Variable universal life insurance is a sophisticated financial product offering permanent life insurance coverage combined with the potential for market-linked cash value growth. Its key features include premium flexibility, tax-deferred growth, and tax-free death benefits. However, it comes with significant investment risk, complex fee structures, and the potential for policy lapse if not managed carefully.

VUL is not suitable for everyone. It requires a long-term perspective, a tolerance for market risk, and a thorough understanding of its mechanics and costs. Before purchasing a VUL policy, it is crucial to read the prospectus, understand all associated fees, and consider how it fits within your overall financial plan.

Navigating the world of variable universal life insurance requires careful comparison and expert guidance. Because VUL policies differ significantly between insurance carriers in terms of fees, investment options, and features, simply choosing the first policy presented is rarely the optimal approach. You need a partner who can survey the entire landscape.

At Insurance By Heroes, our commitment to service – rooted in our founders’ and team’s backgrounds in first response, military life, and public service – drives us to put your needs first. As an independent agency working with dozens of top insurance companies, we have the freedom and resources to compare VUL policies (and alternatives) objectively. We help you understand the nuances, weigh the pros and cons, and find coverage tailored to your specific situation and goals.

Don’t navigate complex insurance decisions alone. Let Insurance By Heroes provide the clear, unbiased guidance you deserve. Fill out our quote form today to start the conversation. We’ll help you assess if variable universal life insurance is the right tool for your financial strategy, or if another solution from our wide range of carrier partners makes more sense. Let us serve you by finding the protection and potential you’re looking for.