Variable universal life insurance: how it works and why you are interested in taking it

Published On - June 25, 2021

David Brown Insurance
types of life insurance

Buying life insurance is a very important decision. It will be an instrument that guarantees peace of mind to your loved ones if you miss it, and also a tool with which you can save and get extra money . If you need insurance that accompanies you throughout your life, it is best to take out permanent life insurance . But if you want a product that gives you room for maneuver and at the same time has a lot of flexibility, what you are looking for is permanent life insurance of a variable universal rate . These policies are very advantageous because they combine the best of variable insurance and the best of universal insurance.

In this article we tell you what universal-variable insurances are and how they work so that you can choose with all the information.

This insurance not only accompanies you throughout your life, it also has investment options

Variable universal life insurance: What you will find in this article

  • What is variable universal life insurance?
  • How variable universal life insurance works?
  • Why you are interested in variable universal life insurance?
  • What is variable universal life insurance?

If you are looking  for life insurance , you will know that you can choose between term life insurance – with a specific term of validity – and permanent life insurance – it is in force for your entire life. Among the latter, you can find several modalities that suit your needs. For example, if you are looking for a serene product, which gives you coverage without having to worry much about its operation, you can opt for a total or traditional life insurance . Or, if you want flexibility and be able to increase and decrease your monthly premiums and other concepts, you can opt for a universal type policy. And if what you like is to make decisions and get the maximum return on your money even at the cost of assuming some risks, you can decide on variable life insurance . But if what you want is to have an insurance that combines the best qualities of the previous ones, what interests you is a permanent life insurance of a variable universal rate.

This type of universal and variable insurance combine the possibilities offered by the universal type and of variable rate . From their union comes a new type of insurance that, on the one hand, uses your money to invest it in equity investment products , and, on the other, offers you flexibility so that you can modify your payment conditions, the final compensation and others. insurance aspects. That is, the result is insurance that requires your intervention and your decisions , so it is important that you know in detail how it works

In essence, like all permanent life insurance, variable universal insurance offers you coverage for life. It is designed to accompany you throughout your life and, when you die, deliver compensation to whoever you decide, also called death benefit.

In this way, your universal variable insurance has a very powerful investment instrument that is used to invest in different products that are listed on the equity markets. Its profitability, therefore, is subject to market movements and is not always guaranteed. And, in addition, it gives you the possibility, for example, to modify your premiums , reducing them or increasing them when it suits you.

If you are interested in this type of variable universal insurance, read on so you can fully understand how it works.

How variable universal life insurance works

Variable universal permanent life insurance is the most complex of the permanent insurances. A complexity that, in reality, is due to the amount of advantages and benefits it offers the insured. Therefore, if you are going to hire it, it is important that you know how it works and what possibilities the variable universal insurance offers you for adaptation and investment .

In this type of permanent policies you will find the same elements as in the rest, with their combined characteristics. The most interesting thing is that it has two very strong instruments: a death benefit and a broad and diversified investment savings component.

  • Qualification. Generally, you will have to go through the qualification process to obtain life insurance. In this qualification you must show what your health status is and what your lifestyle habits are. The younger you are, the more facilities you will have to obtain your coverage in an insurance company, that is why it is important that you take out your insurance as soon as possible. Remember that the qualification process is very important, so it is convenient that you act in it with the utmost honesty, answering honestly to all the questions that the insurer asks you. You may need medical tests, such as blood tests, X-rays, or other tests. Do not try to hide any information. It would be a serious mistake, because if the insurer discovers the truth later, it could cancel your insurance.
  • Cousins. Premiums are the installments that you will have to pay each month to keep your insurance in force. In this case, the premiums take on the characteristics of universal life insurance and become flexible and adaptable. That is, you can decide how much you pay at any given time and increase the payments if you have more money available, or reduce them, or even suspend them, when you need to have your money for another purpose. You can also adjust your premiums to the market, either to invest more, or to protect yourself from specific problems.This flexibility gives you a lot of room for maneuver and is therefore a great advantage. Premiums feed the investment instrument, with which in reality, there is a shift in the risk assumed by the insurer towards the insured, with which you have to be very vigilant, because as you postpone or reduce the premiums, it also reduces your insurance compensation.This occurs because, to keep your insurance in force, the insurer takes money from the cash value that you have accumulated. That gives you time and flexibility, but remember that if you deplete the cash value, your insurance may expire .
  • Investment instrument. As in universal and variable insurance, variable universals are also linked to one or more investment accounts . These products take part of the money you contribute in the form of quotas and invest it in the variable income market, that is, in stocks, investment funds, convertible bonds, currencies, fixed income, real estate or other financial mechanisms. If these investments are profitable, the money you earn will be added to your insurance in the form of increases in compensation and a greater amount of cash value.. But remember that investments in the free market can also go bad and have low returns or lose money. It may even be the case that you have to contribute extra money to keep your insurance in force if the investments go wrong. Therefore, it is imperative that you pay attention to the progress of these investments. For this, it is advisable that you have knowledge about investment and that you are in a position to assume the risk that gambling entails in variable markets.In return, the taxes paid on investment benefits are deferred , giving you more money in the short term to improve insurance and investment.
  • Compensation. The compensation, or death benefit, is the money your beneficiaries will receive when you die. You can decide how much each of them receives and you can also modify the list of people or entities that will receive this compensation after your death.It is tax-free money and in this modality there is a guaranteed minimum, but there may not be maximums: it will grow as your investments provide profitability .Thus, in variable universal life insurance there are two types of compensation : incremental and level .Incremental is one that increases as investment products pay off. Upon your death, the beneficiaries will receive the agreed minimum compensation, plus the returns from the investment in equities.On the other hand, the compensation leveled . In this case, the death benefit is not altered, but is always fixed. In this case, the investment returns will add to the cash value of the policy, and not the compensation.It may also be the case that you prefer to reduce the compensation. One of the inherited characteristics of variable insurance is to be able to modify the death benefit downwards if the insured thinks that he no longer needs such a high compensation. This is frequent in people who already have their lives resolved and do not consider it necessary to leave so much money to their successors. In that case, the benefit may be reduced, thereby reducing the monthly premiums.
  • Beneficiaries. As in all insurance, you must name beneficiaries who will collect compensation upon your death. It is very important to choose the beneficiaries of life insurance well, because later there may be problems if you do not designate them clearly. Insurers allow you to name secondary and even tertiary beneficiaries. That is, people who relieve others of the right to collect as the first designated ones die. A trust fund can also be named as beneficiary so that the money is managed according to your will. Or it can be left as a recipient to a charity. An ill-advised option is to leave the death benefit as part of an inheritance, because probate processes can greatly delay access to money.
  • Cash value. All permanent life insurance works in a similar way: in the first years of validity, when you are still young and your risk of death is low, the premiums you pay are higher than the risk assumed by the company. This is so that later, when you are older and the risk of death is very high, your premiums remain at an acceptable level. But in those first years you pay more and money accumulates that, in variable insurance and variable universal insurance, is also linked to stock market investments, which can fluctuate according to the market. In any case, once that money exceeds a certain level, it is mandatory that it be delivered to the insured, who can use it to redeem future premiums, improve investments in the savings portfolio or whatever he deems appropriate.Also, the cash value can be used to borrow against your amount. If you do, remember that, if you die without repaying that loan, its amount, plus the expenses it causes, will be deducted from the death benefit.

As you can see, variable universal life insurance is a very versatile and flexible product that offers you all kinds of options so that you can decide how to use your money. Its dual nature offers, on the one hand, an important coverage and, on the other, a fairly powerful investment instrument that allows you to operate on the markets and choose the best options for your cash value. At the same time, it is a product with risks and that must be taken into account when making those decisions. For this reason, it is important that you know under what conditions of interest to take out a variable universal insurance.

Why you are interested in variable universal life insurance

Hiring an insurance that combines the best of universal insurance and the best of variable rate is a good idea. But, as you have seen, you must do it with certain precautions, because it is a complex product that requires your attention and your intervention. Even so, you are very interested in these reasons:

  • Permanent coverage. Unlike term insurance, universal variable insurance is still permanent and offers you coverage for a lifetime. In addition, despite the risks involved in investing, there is always a guaranteed minimum in death benefit.
  • Flexibility. If you are looking for a product that suits you, and not one that forces you to adapt to it, this is your insurance: you can modify the premiums, the cash value and the death benefit. When you want to pay less, you can. And if you want to add more money, you can too.
  • Investment. With the powerful tools of investment in equities you will be able to maximize the profitability of your money. This investment option gives you control that other insurances do not give you, but it also forces you to be aware of the evolution of investments in order to make purchase or sale decisions. Remember that, in addition, profitability is never guaranteed and losses can occur. That is, there is an obvious risk that you must take and you have to be clear that you can lose money. Therefore, these policies require knowledge, attention and financial capacity to face losses.
  • Tax advantages. Universal variable insurance has several tax advantages. For one thing, value-added money is tax-deferred. On the other hand, the compensation money is always delivered tax-free to the beneficiaries. Only loans taken against value added are taxed, but very low.
  • Guaranteed compensation. Risking is interesting, because it can generate great benefits, but life insurance has a purpose, which is to provide coverage to whoever you decide once you die. To ensure that this happens, universal variable rate policies always maintain an insured death benefit that will be paid even if the investments associated with the insurance have been unprofitable or deficient.
  • Potential for benefits. With this insurance, combining the flexibility of premiums, indemnification and cash value with investments in equities, you obtain a potential for profits significantly greater than other products. Correspondingly, your risks are also higher.

On the side of the drawbacks or disadvantages , we have to mention some relevant ones:

  • Higher price . Universal variable insurance is more expensive. Much more expensive than term insurance, for example. This is due to the many options they leave in the hands of the insured, and also to its longer duration. The costs associated with the insurance could also be higher than in other modalities and make it more expensive. They are maintenance expenses, administrative expenses and other charges or ‘fees’.
  • Complexity . These types of policies are complex and require effort. You have to be aware of the evolution of investments, study the market and make decisions. That is, they require monitoring
  • Unsecured cash value . If you don’t control your insurance with discipline, you could accumulate little or no cash value. These policies do not guarantee its accumulation, because they use it to cover, for example, the premiums that you stop paying. If you are not constant in maintaining your insurance, you could consume the added value.
  • Risk of losses . As we have pointed out, there is an obvious risk of loss. The accounts and subaccounts used by insurers to channel investments are chosen for their good performance over time. That does not guarantee eternal stability, but at least it minimizes the risk of losses. Another way to reduce risk is to diversify the investment: the larger the investment portfolio, the more likely it is that the good performance of some will compensate for the setbacks of others.

As you have seen, variable universal permanent life insurance offers you many possibilities to get the most out of your money. It also has risks, but if you are able to assume and manage them, you will have complete, flexible and profitable insurance.

In any case, inform yourself properly and do not make decisions without first consulting with experts. Ask your insurance agent and ask for all the details. Insurers are required by US law to report these products carefully, and also to display brochures and illustrations that clarify each part of the insurance.