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What Is Variable Life Insurance?

There are many options for life insurance to fit different policyholders. Some are just looking for a stable income for their family if they pass away or need end-of-life care. However, life insurance can be more than just a savings account. Policies like variable universal life insurance can grow and increase over time.

One of the great things about life insurance is it provides policyholders with a tax-free way to put aside money for their families. Variable universal life insurance (VUL) allows those savings to be actively used in the market. With the right policy, you can invest your money for years to come.

VUL is a type of permanent life insurance, a policy created to last until the policyholder’s death. Unlike term life insurance, which only lasts for specific periods (e.g., 10, 20, or 30 years), permanent policies guarantee families’ payout. As long as you keep up with payments, you will receive a final benefit. 

Investing With Cash Value

One of the biggest advantages of permanent life insurance is its ability to accrue cash value. Cash value is essentially how much your policy is worth. Your cash value builds over time as you make premium payments. It can be used in different ways, including taking out a loan or growing a savings account. One of the unique ways VULs use cash value is through investments.

As you make payments towards a VUL policy, the money is put into two separate accounts. The first is a tax-deferred savings account, where your money can accrue cash value and secure a payout for your family. The second account is called an investment subaccount

Subaccounts put your policy’s cash value towards investments. They work like mutual funds and accrue annuity that rises and falls with the market. A VUL’s variable annuity forms a contract between you and your insurance company. In exchange for the money you give, your provider will offer high-quality investments provided by the company. 

Overall, VUL subaccounts offer a way for both insurance companies and policyholders to make money. The policyholders have the chance to increase and grow your investments. At the same time, insurance providers can use the cash as securities offerings and invest in company projects. However, VULs are based on market trends and can lose money as much as they gain it.

Benefits of Variable Universal Life Insurance

VUL is a great way to invest money that would usually just go towards your policy. Instead of just paying premiums, the policyholder can invest the money and accumulate more cash value than they would on a standard plan. 

With this extra money, you’re able to increase your death benefit, pay your premiums, and even withdraw funds. (If used carefully, insurance policies offer guaranteed, low-interest loans for policyholders.) On top of all this, since it comes from your insurance policy, the money is tax-deferred.

VULs are great for people who want to make flexible decisions about where their money is invested. However, though these plans offer many different options, they also require maintenance and come with some risks.

Trade-Offs With Variable Universal Life Insurance

Because VULs are investments, they are subject to changes in the market. If your investment loses value, so does your VUL. If you do decide on a variable plan, choose your investment carefully. Once you’ve invested, you’ll also need to monitor your plan and keep track of market changes. Should the market lapse, you might need to resume premium payments if you used your cash value to cover costs. 

Keep in mind if you lose your coverage or have to surrender your policy, you’ll need to pay taxes on whatever money you receive. If you’ve taken out any loans from your policy, that money will also be taxed.

Should I Get Variable Life Insurance?

While VULs may be appealing to policyholders who enjoy the buzz and risks of trading, it’s not for everyone. If you prefer a more hands-off approach, take a look at other types of permanent insurance. 

Whole life plans also accrue cash value, but without risking funds in the money market. Instead, they accrue interest over time as you pay your premiums. If your cash value grows enough, you can use it to cover these payments. In the long term, whole life insurance can be just as beneficial as a universal variable plan.

There are many ways insurance plans are a sound financial investment. They provide tax-deferred death benefits for your children, which give money directly to your family without estate taxes. They can be used as savings accounts or a source of tax-deferred loans. 
If you have a life insurance policy, talk with an agent about taking advantage of your plan. If you’re still looking at policies, compare different plans and providers online. Life insurance can be daunting, but you can get a plan that pays for itself with the right tools.

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