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Variable Universal Life Insurance; The right policy for the right person

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Variable universal life insurance is a very old, but often misunderstood type of life insurance. At one time, it was possible for a person with such a policy to lose their entire investment, but modern safeguards help protect you from the dangers of market loses by including no lapse clauses.

To help define VUL, let’s briefly review the basic types of life insurance: they are Term, Whole Life, and Universal.

There are numerous variations on each of the three types, but it is easy enough to understand the basics. Term, you may recall, is life insurance for a particular time period, usually 20 years although a few policies for young people are available with 30 year initial periods. Regardless of what an agent or phone rep says, term policies will always increase in price after the initial period. Also, since you are only paying the cost of insurance and annual fees, there will be no cash value and you will not be able to borrow against the policy.

Variable Universal Life InsuranceWhole life is exactly the opposite of Term. You pay a set premium, and your insurance is in force until the day you die, beginning with the day that initial premium is paid and the policy is issued. While there are modified versions, a “guaranteed whole life” policy will not change either the premium or the face value during your life time. You may borrow against the policy, and may cash surrender it for the savings if you decide in later life that you no longer need it.

A universal combines the features of Term with those of whole life. It is a type of permanent life insurance, but is flexible in that you can vary both the face value and the premium according to your needs. The premium is actually invested in a savings account which is backed by the assets of the company; it is from the savings account that the cost of insurance is paid each month. Due to the flexible nature of universal, the premium is generally less than that of whole life.

A variable universal takes the savings idea one step further and actually allows you to invest it in the stock market or in whatever variable funds the company has in its portfolio. The investment is a separate account, not subject to the company’s creditors, and not guaranteed as to safety.  As your funds grow, so does the face value of the life insurance, and it is possible to grow your funds to the point that you no longer need to pay premium. It is also possible for your investment account to take a steep drop during an economic downturn. However, today’s variables will always guarantee a minimum face value below which your death benefit will not drop (as long as premium is paid) regardless of what the investment account does.

Unlike other life insurance products, the VUL requires a person with a license in securities as your funds will be invested in stocks, bonds, mutual funds, or whatever you choose. Also, due to the complexity of the policy, you can expect higher annual expense charges than for other types of policies.

A variable universal can be a very good investment for a younger person, but you should usually work through a dependable agent or broker who will watch your account regularly and be able to recommend changes in allocations of your funds as appropriate. Of course, if you understand securities, you can direct the investments yourself, but most people lack the time and the know-how to manage their own VUL account.

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