The Differences Between Variable Life Insurance (VLI) and Variable Universal Life Insurance (VUL)

Thang Truong
Thang Truong
Updated on:

If you are frustrated with the slow cash-value growth in a traditional whole life insurance policy, variable life insurance (VLI), or sometimes called variable whole life insurance, is the answer. These products started being offered in the 1980s to meet the demand for an insurance policy that could grow at the same rate as the booming markets. Over the years, VLIs have evolved to combine their benefits with the best features of universal life insurance policies in another product called, variable universal life (VUL) insurance. Few companies still offer VLI product today. They have all evolved to offer VUL product instead.

What is Variable Life Insurance?

Variable life insurance is a type of whole life insurance that allows you to select how the cash-value in your policy is invested. When you make a premium payment to your whole life policy, your cash-value grows a little each month at a guaranteed rate. Since the growth rate is guaranteed, insurance companies usually invest cash value of whole life policies in conservative assets, thus the return rate is modest. For some policyholders that growth isn’t fast enough.

That’s where VLIs come in.

Policyholders can choose to place the cash-value portion of their insurance policies into investment products, such as money market funds that hold a range of assets from stocks to real estate. You have the choice of which investment subaccounts your cash-value goes into and you can even break up the cash-value into different investments from conservative to risky. Thanks to the option of investing your cash-value, it’s also possible to increase the value of your policy beyond the minimum death benefit if the investments perform well.

Yet, policyholders also enjoy the benefits that come with having permanent life insurance. These policies usually offer a level premium payment and guaranteed death benefit with the freedom of choosing how your money in the cash value is invested. So you have the benefits of both worlds, a guaranteed death benefit and the ability to invest cash value in assets of your choice that you believe are of the highest returns.

Since VLIs have an investment component, they are considered securities so insurance companies must follow strict rules about how much cash-value a policy can hold and maintain the licensing necessary for these products. There may also be additional fees to cover the costs of having an investment account.

Key Features of VLIs:

  • Ability to choose how cash-value is invested
  • Up to 50 investment opportunities available
  • Level premiums for life
  • Guaranteed death benefit plus cash-value
  • Potential for cash-value to be worth more than death benefit
  • Tax-deferred growth asset and tax-free when drawing
  • Tax-free death benefits for beneficiaries

The Challenge of Finding Variable Life Insurance Policies

Once a popular newcomer in the insurance industry, many companies have set aside VLIs in favor of the variable universal life (VUL) insurance policy. You may know people who still hold a VLI policy that they picked up as recently as 2019 from insurance providers like Prudential. However, it appears that most companies have stopped offering new VLIs. 

Nationwide Insurance still offer VLIs along with their VULs to customers. However, the website is pushing VULs hard and you have to look at their complete list of available variable life products to see some VLI products. So, they may soon stop offering these products or may even have stopped actively selling them.

What is Variable Universal Life Insurance (VUL)?

Variable universal life insurance (VUL) is a type of universal life insurance products. Variable universal life insurance is great for people who want to use life insurance to maximize supplemental retirement income through cash distributions, benefiting from the tax advantage of investment growth in a life insurance. Indexed universal life insurance can be used for similar purpose too, despite with a bit more conservative investment philosophy. They both are great options that can be used for retirement planning. Learn more about using life insurance in retirement planning through a case study.

While VLI offers both guaranteed death benefit and maximizing cash value account, VUL is great for people who don’t really care about death benefit and whose main goal is to maximize income tax-free cash distribution from the cash value account.

A big part of what makes variable universal life insurance (VUL) so popular these days is their superior flexibility. This type of variable life insurance allows policyholders to invest their cash-value in financial products and also adjust premiums and death benefits as needed. Learn more about the pros and cons of variable universal life insurance

For instance, someone may have a high premium when they first set up a policy to start building cash-value fast. After a few years, the policyholder may decide to reduce the premium payments to a more affordable level for their budget. They can also choose to increase their premiums again later on if they wish as long as their policy doesn’t become a modified endowment contract (MEC). If it becomes an MEC, they will lose the usual tax benefits of a life insurance policy. You could even choose to stop the premium payments have the premiums deducted from the policy’s cash-value. Just be careful not to let the cash-value become depleted, otherwise your policy could lapse.

Some of these policies may also offer guarantees that the beneficiaries will receive the minimum death benefit plus the greater sum of the premiums paid in or the policy’s cash-value.

>>MORE: Understanding How Variable Universal Life Insurance Works

Key Features of Variable Universal Life Insurance:

  • Up to 50 investment products
  • Flexible premiums
  • Flexible death benefit
  • Tax-deferred investment growth and tax-free when drawing in future
  • Tax-free death benefits for beneficiaries

Best Variable Universal Life Insurance Companies

It can be hard to pick the right VUL from the many life insurance companies offering them these days. Here are a few that best fit different customer’s needs:

Nationwide – Best for Discounts

This brand offers many kinds of insurance, including VLIs and VUL policies. You can also get a survivorship insurance policy that covers a couple with the policy paying a death benefit when the second policyholder dies. They also offer discounts to make getting insurance more affordable. These include:

  • Bundle Discount: Available when you bundle multiple policies, such as car insurance, renter’s insurance, and life insurance through their brand.
  • VUL Rewards Program: If you meet the minimum premium guidelines, Nationwide can reduce premiums by 25% when you reach year 21 of a policy. 

Prudential Insurance – Best for Established Service

Prudential is a recognized leader in the insurance industry that has served customers since 1875. They have offered VLIs and VULs since the 1980s. Currently, they are only selling three VULs, including one survivorship insurance policy for a couple. Prudential also stands out by offering over 50 investment options for their policies.

New York Life – Best Mutual Insurance Company

As a mutually owned insurance company, New York Life is set up so that the policyholders are the owners of the company rather than stockholders. This means that their investment options may be a little more conservative, but are safer for policyholders in general. They also offer riders with additional benefits, such as a guaranteed minimum accumulation of cash-value, a monthly deduction waiver, and a premium waiver.

Principle Insurance – Best for Annuity Conversions

If you want the option of using your life insurance as a stable source of income, consider a VUL from Principal Insurance. They make it easy for you to convert your variable universal life insurance policy into an annuity to receive income in retirement. Though, when you convert to an annuity, you’ll lose the death benefit on your policy.

Final Notes:

  • Variable life insurance allows you to invest the cash-value of your policy to potentially earn greater returns.
  • Variable universal life insurance allows you to adjust premiums and death benefits, as well as, invest the cash-value.
  • There are few insurance companies currently offering variable life insurance in the United States.
  • You can get VUL insurance from a number of insurance companies, including Prudential, New York Life, Principle Insurance, and Nationwide Insurance.
Thang Truong

Thang Truong covers small business insurance and small business success at BravoPolicy. He is a licensed P&C insurance agent. Previously, he held product leadership positions at, Capital One, NerdWallet, and Mulberry Technology. He holds a MBA degree from UC Berkeley - Haas School of Business.

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