Variable Universal Life
Insurance: An Option for Young Investors
you have a reasonably good understanding of the way the stock market
works and would like to have an active role in controlling the investments
made for your life insurance, a variable universal life insurance
policy is worth considering.
In general permanent life insurance, like any other kind of insurance,
is a financial instrument in which you pay a premium which a company
invests in a portfolio of investments. When you buy whole life insurance,
the risk is all on the backs of the company. All you have to do
is keep up with your premium, and the company guarantees payment
of the face value of the policy whenever you die.
A universal policy is
still mostly at the risk of the company, although you do share some
of the risk. The universal policy is based on the interest rates
and on the fact that your cost of insurance is less in early years.
Thus, even though the company would have to pay the entire face
amount if you die young, since the odds of that are relatively slim,
first years' premium will go a long way toward building a solid
cash value; of course, that's assuming you pay more than just the
minimum premium. The risk for you is primarily in the interest rates.
If interest rates decrease, you may have to increase your premium
to keep from exhausting your cash value on the cost of insurance
which increases as you get older. The policy is flexible, however;
so if it became necessary to increase your payment beyond your budget,
you could simply lower the face value, eliminate riders, and so
A Variable Universal Life policy (VUL) is not available with all
companies as the agents have to have a general securities license
in order to sell this type of policy. Because of the ability on
the part of the owner to invest in a variety of equity funds, VUL
also has to be registered with the SEC and sold with a prospectus.
As you might suspect, it is usually more expensive than regular
universal life, but the benefits can be worth the additional cost.
VUL combines some of
the features of both whole life and universal life and adds an investment
component. A VUL usually has a permanent life insurance component
which guarantees that a beneficiary will receive minimum benefit
as long as there is enough cash value in the accumulation account
to pay the cost of insurance.
The biggest difference
between a VUL and a UL is that the risk of the investments is born
by the policy owner. You invest the cash value in a variety of funds
available through the company. These funds are much like mutual
funds, but are treated somewhat differently for tax purposes. They
usually range from the ultra-conservative to the highly speculative
and can realize substantial growth. These funds grow tax-free and
can be accessed by borrowing against them.
The downside of the VUL
is that if the funds in which you choose to invest perform purely,
you can lose your entire investment. For this reason, most companies
guarantee a minimum payout on the death benefit as long as a minimum
premium is paid.
While market volatility
makes the VUL a poor choice for a senior who can't afford to lose
any investments, it can be a very attractive way to build a legacy,
shelter an estate from taxes, and help fund your retirement.
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