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Variable Universal Life Insurance Offers Flexible Premiums, Investment Growth

By Mike Heuer

One of the most flexible types of life insurance sold it the variable universal life insurance (VUL) plans that enable policyholders to choose among several investment options and make flexible premium payments based on the cash value accumulated over the years. VUL policies are a version of whole life insurance but with greater growth potential. Proper investing can result in returns of more than 7 percent over the life of the contract whereas standard whole life insurance plans offer returns of about 2.5 percent, according to the National Association of Insurance Commissioners.

Because the VUL policies can grow cash value at a greater rate than standard whole life insurance polices, the cash value can be withdrawn as either loans or standard cash withdrawals from time to time so long as they remain funded. Depending on how much remains in the cash value, policyholders can adjust the regular premiums from zero to the maximum allowed by the federal Internal Revenue Code, which limits contribution amounts to help protect policyholders. Many VUL policies allow their policyholders to take out loans against the cash value. But the loans must be repaid with interest so they are funded fully.

While VUL policies can outpace standard life insurance plans due to their investment potential in mutual funds, the U.S. Securities and Exchange Commission exercises authority over the life insurance plans. And VUL policies only can be sold by insurance producers who have passed their respective state life insurance examinations and are licensed as investment advisors.

Because VUL plans are types of whole life insurance policies, there is no federal income tax applied to the benefits that paid out. Their tax-free advantage makes it possible to give cash gifts to the children of policyholders that they can use to investment in VUL policies of their own. And that allows them to take out loans against the cash value to of their existing policies to help pay for tuition, new or used vehicles, make a down payment on a home and other things without incurring a tax penalty.

As with whole life plans, once the cash value reaches the amount intended for the death benefit, then that policy has matured and no other premiums must be paid. If the investments grow at a greater rate than expected, the final death benefit will be larger than the face value sought for coverage. That can mean a much larger financial legacy for beneficiaries.

Some VUL policies also come with a guaranteed death benefit that can reduce the risk of an investment possibly going bad and causing a financial loss after being in force for a set number of years. A minimum premium amount must be paid to keep the insurance in force. And as long as that is done, a death benefit will be issued regardless of other investment performance. Such guaranteed death benefits can be a big help when a named insured dies early and not much cash value has accrued or when investments in optional mutual funds do not pan out.