A variable universal life insurance policy, known in the insurance industry as a “VUL,” has many benefits. It offers permanent life insurance and allows you to invest your cash value funds as you see fit within the policy.
Apportionment of Your Money When You Purchase a VUL
Unlike a term life insurance policy, a VUL builds cash value. This cash value accrues because a part of your insurance premium is applied to pay for the life insurance portion of the policy while the rest is placed in a separate account where it can earn more dollars for you.
There are many restrictions on managing the cash account for your variable life insurance policy. The Securities and Exchange Commission (SEC) oversees such accounts due to their volatile nature. When you purchase your policy, you must designate which type of investment accounts your money will go into.
How Cash Value Accounts Function in a VUL
Your cash value account functions as a mutual fund for all practical purposes. In many VULs, the buyer has 10 to 20 choices to invest their cash value dollars. With so many choices, how do you choose which one is right for you?
Review these points when choosing VUL investment options:
- Consider your overall financial goals. Just as with any investment, you can align your VUL investment choices with your financial goals, choosing conservative or aggressive investments or somewhere in between, depending on your level of risk tolerance. For example, if you want aggressive growth and know the financial market, you’ll be more likely to select aggressive growth vehicles offered within your VUL. On the other hand, if you’re more conservative in your investment goals, you might stick with more “fixed” types of investments offered within your VUL, like a money market fund.
- Recognize the limits of your VUL. The company sponsoring the policy limits choices for investments in VULs. Shop around before purchasing your VUL to find options you’re most comfortable with. For example, Insurance Company ‘A’ might offer three choices for your VUL investments (such as stocks, bonds, and money market), whereas Company ‘B’ offers 15 choices (a variety of equities, plus real estate bonds, high-yield corporate bonds, and various other investment vehicles).
- Think about diversification. Another essential element related to investment choices for your VUL policy is diversification. Do you feel more secure with many smaller investments? Remember that the larger the number of investment vehicles you select, the more you’ll probably pay because you’ll be charged a separate fee for each vehicle. Some financial experts believe it’s wiser to designate just two or three investment vehicles to limit the money used to pay investors’ fees for your VUL policy.
- Take overall investors’ fees into account. Bear in mind that the premiums for VULs are double or even triple the amount you would pay for a term life insurance policy, mainly due to the costs of accumulating and managing the funds found in the separate cash value accounts. Ensure you understand how and when such fees will be charged and the fees before you buy a VUL.
- One option, if available, is to let experts manage VUL cash funds. If you’re unsure about your capacity to make investment decisions, ask your VUL agent if you can have the company’s management professionals manage the cash funds for you. Of course, this move would be most wisely made before purchasing a VUL.
You can choose how to invest your cash value monies in your VUL. Ensure you understand your VUL before purchase. As with any investment, remember you can incur financial gains or losses over the short or long term based on decisions regarding your VUL.