Variable Universal Life: Astute Management Required
by Peter Katt
Variable universal life is a complex and difficult to manage life insurance asset. This column describes the issues, but purchasing such a policy requires astute guidance.
Variable universal life allows policyholders to control how their policies’ premiums are invested. Policyholders choose from a preset set of various sub-accounts, which are mutual funds. Due to the higher expenses, most variable universal life buyers select equity-based funds. Though this does provide the opportunity for higher returns, variable universal life policies invested in equities will have investment results that are volatile and unpredictable—with occasional dramatic cash value losses. This plays havoc with trying to select a premium schedule to follow.
This is an important distinction to pay attention to. Whole life and universal life policy premiums are mostly invested by the insurance company in investment-grade bonds held for yield. Therefore, investment results for whole and universal life policies will change relatively slowly and are backed by a minimum guarantee, which means the cash values can never take a loss. (However, the cash values can go down when policy expenses exceed the crediting amount.) In contrast, the cash values associated with variable universal life policies can suffer dramatic losses.
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