Deciphering Variable Universal Life Insurance: What Is VUL?
Recently I received a couple of emails asking me to comment on Variable Universal Life (VUL) insurance products. While many are aware of the hefty fee associated with universal life insurance policies, people also consider the attractive features like tax-deferred growth, policy owner's flexibility in deciding how the premiums are invested, and the capability to tap into the accumulated cash value through policy loans.
To be honest, being in my late 20s and a firm believer of KISS (keep it simple, stupid) philosophy, I hadn't given such fancy products much thought (I do have enough term life insurance coverage).
That's until this week. During the weekend, I spent some time reading some literature about some VUL products. While I certainly understand my weekend cram session cannot exhause all aspects of these complex products, I do feel comfortable to share some initial observations in the next few posts. I will start this series my give a top-level overview of VUL as an insurance category, then analyze its pros and cons by studying a specific VUL product.
So, what is Variable Universal Life (VUL) insurance?
It is actually hard to describe VUL in a sentence or two; it is a hybrid of many different features of other life insurance products. Its key features include:
1. Death Benefit: There is a payout upon death (the L or "Life" in VUL)
2. Cash Value: A VUL policy has a cash value that over time, enjoys tax-deferred growth or tax-free growth (dependings on how the policy is cashed out). (the U or "Universal" in VUL)
3. Investment Flexibility: Policy owner can decide how premiums get invested among a number of funds. This means death benefit and cash value can change over time based on policy owner's decisions, and policy owner takes all the risks of performance. (the V or "Variable" in VUL)
4. Loan Against Death Benefit/Cash Value: Policy owner can borrow against the cash value or death benefits of the policy, usually without tax consequences.
So, you have many dream features, like tax-advantaged growth, self-directed investments and liquidity (i.e. policy loans). Does this make VUL a perfect product? Let's look into a specific VUL product in the next few posts in this series.
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http://www.consumerfed.org/VULReport0203.pdf
Even the cheapest VUL is too expensive. Most are just money suckers. The question now is what would be the best exit strategy if you have already opened a VUL. Conversion to annuity? Let it expire? Or keep it going?
