The Pros and Cons of Variable Universal Life Insurance (VUL)

Thang Truong
Thang Truong
Updated on:

If you’re looking for a way to invest money while having the peace of mind of a life insurance policy, then you’ll want to look into variable universal life insurance (VUL). These types of policies offer a high degree of investment options. Read on to learn more about what they are and if they make sense for you.

What is Variable Universal Life Insurance? 

Variable universal life insurance (VUL) is similar to indexed universal life insurance (IUL) in that it’s a policy geared towards people who want to use their life insurance funds to invest and grow their cash value. However, where variable universal life insurance differs is that you invest directly in the underlying sub-accounts of the policy. These are tied to financial markets, and your policy value may change as the markets go up or down. You can also move your funds among these investment options by moving money among the sub-accounts. Some insurance companies offer a standard portfolio option that you can opt in if you don’t want to actively manage the investment.    

These are permanent life policies, meaning you never need to renew the policy and risk getting higher premiums.

>>MORE: Differences Between Variable Life Insurance (VLI) and Variable Universal Life Insurance

Common Product Features of Variable Universal Life Insurance (VUL)

A few of the features at a glance include:

  • The ability to accumulate cash value in the account
  • The ability to invest in stocks, bonds or a combination, often basically creating an investment portfolio 
  • Premiums and death benefits you can adjust as you go

This is one of the most flexible and customizable options of any of the permanent life insurance types.

Cash value growth through investment returns are tax-deferred. When you withdraw money from cash value account, it is also income tax free as long as the life insurance policy doesn’t become a modified endowment contract.

You can skip premium payments if the money is tight as long as there is enough money in the cash value account to pay for the pure cost of insurance and administration fees and expenses charged by insurance companies. The policy is designed to automatically withdraw money from the cash value account to pay for pure insurance cost and fees if premiums do not come in to keep the policy in force.

You can also use the cash value account in the policy as collateral for a loan. This is known as collateral assignment of life insurance.

>>MORE: Understanding How Variable Universal Life Insurance (VUL) Works

Variable Universal Life Insurance (VUL) Riders 

This type of insurance also has a wide variety of riders that you can add. However, some common types you may see include:

  • Accelerated Benefit Rider for Terminal Illness: Allows a portion of the death benefit to be paid out to the insured if they have a terminal illness
  • Children’s Insurance Rider: Allows coverage of children for additional premiums. Learn more about life insurance for children.
  • Waiver of Monthly Deduction Rider: Monthly deductions get waived if the insured becomes totally disabled

These are just a few common examples. Companies vary on the types of riders they offer, so it’s important to discuss this option with an agent.  

>>MORE: How Much does a $2 Million Variable Universal Life Insurance Policy Cost?

Pros and Cons of Variable Universal Life Insurance (VUL)

To make it more easy to see if this plan is right for you, below we’ve outlined the pros and cons of such a policy.


  • If you want to maximize your supplemental retirement income through your cash value account and don’t care so much about the death benefit of a life insurance policy, this insurance product is the best for you.
  • It is a great retirement planning product, especially for boosting supplement income. Learn how to use life insurance in retirement planning through a case study.
  • You could have higher gains if your portfolio is chosen well enough.
  • There are adjustable premiums and death benefits.
  • You can withdraw funds or take loans against the cash value, often tax-free if you follow certain guidelines. Learn more about life insurance proceeds are not taxable.
  • Earnings or investment gains and withdrawals are 100% tax-free

>>MORE: How Much does a $5 Million Variable Universal Life Insurance Policy Cost?


  • As mentioned above, you have more instability with this system. These plans are not subject to the floors and caps of an indexed universal life insurance policy, so you could risk reducing your death benefit if your portfolio performs badly enough, according to Allstate. However, some companies do offer protections that guarantee a minimum death benefit, such as Protective. 
  • If your investments lose value, your premium could increase.
  • You might see other investment expenses on your account that other life plans may not have.

This type of plan is best for those who are confident in their investing knowledge and have a higher tolerance for risk.

>>MORE: Cases Studies of Universal Life Insurance

Whom is Variable Universal Life Insurance (VUL) for? 

These are policies for people who want a more direct hand in investing and are comfortable with market risk.

However, you can have greater rewards under a system like this, but you can also have greater losses. To the point where you could lose your entire death benefit if the policy lapses. So these policies are best for people who have strong investing knowledge and a tolerance for risk.     

If death benefit coverage is important to you since you are buying a life insurance policy eventually, this product is not for you. Instead, you should consider Guaranteed Universal Life Insurance, which will guarantee you the dead benefit coverage; or Indexed Universal Life Insurance, which will reduce the risk exposed in your cash value account.

Variable Universal Life Insurance is used widely by high net-worth individuals through private placement life insurance to combine the financial advantages of hedge funds with the tax benefits of life insurance.

How Much Does Variable Universal Life Insurance Cost? 

We have an illustration of a plan for a man who started a policy when he was 45 years old. The coverage amount is for $150,000. He pays $230 in monthly premiums.  

Based on the way he has his policy invested, it’s projected that his policy value will start at $1,819 and reach $158,371 by the age of 70. Meanwhile, by age 70, his total death benefit will be at $308,371.

In his first year, he has access to none of the cash value, but by the second he has access to $640. By the time he is 70, he has access to $158,371, the same amount as the total cash value.  

By this example, you can see how the policy accumulates value over time.

Final Thoughts

Variable universal life insurance offers some of the most flexible options in the life insurance world. You have access to cash while still living and flexible premiums and benefits. However, a major feature of this type of insurance is that you can use your funds to invest in markets. This can create more risk and reward. As such, this plan is best for those who are comfortable with risk and want to maximize cash value account, or distribution, and minimize death benefit.

Thang Truong
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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