Variable Universal Life
A type of permanent life insurance that combines life insurance protection with investment options in separate accounts. Policyholders can adjust their death benefits and premium payments while directing their cash value into various investment funds.
Example
“Sarah chose a variable universal life policy so she could invest her cash value in stock funds while maintaining flexibility in her premium payments.”
Memory Tip
Think 'VUL' - Variable (investments vary), Universal (flexible), Life (insurance protection).
Why It Matters
VUL policies offer potential for higher returns than traditional whole life insurance but come with investment risk. Understanding this product is crucial because poor investment performance can affect both cash value growth and the sustainability of the policy itself.
Common Misconception
Many people assume that variable universal life insurance guarantees investment returns like whole life policies do. In reality, the investment component can lose money, and poor performance may require higher premium payments to keep the policy in force.
In Practice
John, age 35, starts a VUL policy with a $500,000 death benefit and pays $5,000 annually. He allocates his cash value across stock and bond funds. After 10 years of good market performance, his cash value grows to $45,000. However, during a market downturn in year 11, his cash value drops to $38,000, demonstrating the investment risk involved.
Etymology
Developed in the 1970s as an evolution of universal life insurance, adding 'variable' to reflect the investment component where returns vary based on market performance.
Common Misspellings
Compare insurance quotes and save
Related Terms
More in insurance
Other insurance terms you should know
See Also
Need help with spelling?
Instant spelling checker with dialect variants for 2,000+ words.