Variable Life Insurance and Universal Life Insurance: Which Features Differ?

Variable life insurance and universal life insurance are key components of permanent life insurance, each designed to meet different financial goals and risk preferences. Understanding their distinctions is essential for policyholders seeking a plan that aligns with their long-term objectives.

These policies differ in terms of premium payments, cash value accumulation, investment options, death benefit flexibility, and loan provisions.

Premium Payment Approach

The premium structure is a fundamental difference between variable life insurance and universal life insurance. Variable life insurance requires fixed premiums at regular intervals, offering predictability for financial planning. However, this rigidity may limit flexibility if financial circumstances change.

Universal life insurance, on the other hand, provides a more adaptable premium payment structure. Policyholders can adjust payments within certain limits, depending on the policy’s cash value and insurance costs. This flexibility allows for lower payments during financial strain or higher contributions to build cash value in better times. Additionally, accumulated cash value can cover premiums when needed, offering a buffer during economic challenges.

Cash Value Features

The cash value component in both policies acts as a savings mechanism but operates differently. In variable life insurance, cash value is tied to the performance of investment subaccounts selected by the policyholder. Market fluctuations can lead to growth or decline in cash value, with strong market performance potentially increasing the policy’s value. Conversely, poor performance can reduce cash value, possibly requiring additional premium payments to sustain the policy.

Universal life insurance offers more predictable cash value growth, often tied to a benchmark interest rate or a minimum guaranteed rate. This stability appeals to those seeking reliable growth without exposure to market volatility, making it easier to plan for future needs like retirement or unexpected expenses.

Investment Subaccounts

Investment subaccounts are a hallmark of variable life insurance. Policyholders can allocate premiums among various investment options, such as mutual funds across asset classes like equities, bonds, and money market instruments. These subaccounts provide growth potential but require careful management and monitoring of market conditions. Policyholders must also consider the risks, as poor investment choices can negatively impact cash value and the policy’s overall performance.

Universal life insurance does not typically include such investment options, focusing instead on stable cash value accumulation. The Securities and Exchange Commission mandates that insurers provide detailed information about investment subaccounts in variable life insurance, ensuring policyholders are informed about objectives, risks, and performance history.

Death Benefit Options

Death benefit options determine how proceeds are distributed upon the insured’s passing. Variable life insurance typically offers a choice between a level death benefit and an increasing death benefit. A level death benefit provides a fixed payout, while an increasing death benefit grows with the policy’s cash value. The latter option can appeal to those seeking to leave a larger legacy but often comes at a higher cost due to increased risk to the insurer.

Universal life insurance offers similar death benefit options, allowing policyholders to align coverage with their financial goals. Both policies provide flexibility in tailoring the death benefit to meet specific needs.

Policy Loan Availability

Both variable life insurance and universal life insurance allow policyholders to borrow against their accumulated cash value. Loans provide liquidity without triggering taxable events, provided the policy remains active. Variable life insurance loans are typically limited to a percentage of the cash value and accrue interest, which can range from 4% to 8%. If the loan is not repaid and the policy lapses, the borrowed amount may become taxable as income under Internal Revenue Code Section 72(e).

Universal life insurance loans often feature more flexible terms. Some policies offer options like fixed or variable interest rates or a “zero net cost loan” after a set period, where the interest charged is offset by the interest credited to the cash value. However, excessive borrowing can deplete the cash value and jeopardize the policy’s sustainability, especially if cash value is already being used to cover premiums.