Uses of Variable Life Insurance

Variable universal life policies are useful for policy owners who expect their needs to change over time. Within certain guidelines, the policy can be modified by changing the death benefit or premium payments. They are also well suited for use by policy owners who are comfortable with the risks and rewards of investments, or who need life insurance with the potential to provide an increasing death benefit. Some common uses are:

  • Family Protection: To provide the funds to support a surviving spouse and/or minor children, or to pay final bills such as medical or other estate expenses, as well as federal and state death taxes.
  • Business Planning: Because of its flexibility, variable universal life insurance is often used for many different business purposes, such as insuring key employees, in split-dollar insurance arrangements, and funding non-qualified deferred compensation plans. Business continuation planning often involves using variable universal life as a source of funds for buy-sell agreements.
  • Accumulation Needs: Some individuals will use the investment features of variable universal life as means of accumulating funds for specific purposes, such as funding college education, or as supplemental source of retirement income.
  • Charitable Gifts: To provide funds for a gift to charity.

Additional Policy Elements

Variable universal life policies have a number of additional elements to consider:

  • Investment Options: Most variable universal life policies offer a policy owner a wide range of investment options, including basic stock, bond and money market funds. Depending on the policy and insurer, other options, such as index funds, real estate funds, foreign stock funds, or zero coupon bond funds may also be offered. A policy may also include a “fixed” account option, in which the insurer guarantees a fixed rate of return.
  • Surrender Charges: Most variable universal life policies have substantial surrender charges, if a policy is terminated. These surrender charges are generally highest in the early years of a policy, and decline over a period of time, usually from seven to 15 years.
  • Policy Loans: Variable universal life policies typically permit the policy owner to borrow at interest a portion of the accumulated cash value. The rate charged on the borrowed funds is often lower than current open market rates. A policy loan will reduce the death benefit payable if the insured dies before the loan is repaid; a policy loan will also reduce the cash surrender value if a policy is terminated.
  • Partial Withdrawals: Most variable universal life policies allow a policy owner to withdraw a portion of the cash value, without terminating the policy. Such withdrawals reduce the amount of death benefit payable, and may be subject to current income tax, if the policy is classified as a MEC. Some contracts allow a policy owner to put the withdrawn funds back into the policy, but the insured may have to provide evidence of insurability to restore the original death benefit.
  • Surrender Options: If a policy owner surrenders a policy, there are generally three ways in which the accumulated cash value may be received, including: (1) taking the accumulated cash value, less any surrender charges; (2) receiving a reduced amount of paid-up whole life insurance, or (3) taking paid-up term insurance in an amount equal to the original face amount of the whole life policy.

Optional Policy Provisions

A number of optional provisions, commonly referred to as “riders”, can be added to a basic variable universal life policy, through payment of an additional premium:

  • Waiver of Premium: Suspends the monthly deduction for the “protection” element of the policy, if the insured becomes disabled and is unable to work.
  • Accidental Death: Pays the beneficiaries double (in some situations triple) the face amount of the policy if the insured dies in an accident.
  • Spousal or Family Term Life Insurance: Allows a policy owner to purchase term insurance on a spouse or children.
  • Accelerated Death Benefits: An Accelerated death benefits provision allows for payment of part of a policy’s death benefit while an insured is still alive. Such benefits are typically payable when the insured develops a medical condition expected to lead to death within a short period of time.