With a typical whole life policy, the death benefit is limited to the face amount specified in the policy, and at endowment age, the face amount is all that is paid out. If this continues long term the savings will be depleted and insured will be given an option to increase the cash outlay to cover the higher cost of insurance or cancel the policy leaving them with no savings and either no insurance, or very expensive insurance. Descriptions of financial products contained in Learning Center articles are not intended to represent those offered by Protective Life or its subsidiaries. Email. Tweet. Product guarantees are backed by the financial strength and claims-paying ability of the issuing company. In order to get a 9% rate of return in an ordinary taxable account, in a 34% tax bracket, one must earn 13.64%. In a VUL, the cash value can be invested in a wide variety of separate accounts, similar to mutual funds, and the choice of which of the available separate accounts to use is entirely up to the contract owner. Many advisors will point to the high fees of a variable universal life insurance product and declare it a bad investment, but this really only tells part of the story. The percentage ranges from 30% or so for young insured persons, declining to 0% for those reaching age 100. Proper funding, investing, and planning are usually required in order for the VUL to work as expected. Group Variable Universal Life insurance (GVUL) is issued by Metropolitan Life Insurance Company (MLIC), New York, NY 10166, and distributed by MetLife Investors Distribution Company (MLIDC) (member FINRA). In one theory of life insurance, needs based analysis, life insurance is only needed to the extent that assets left behind by a person will not be enough to meet the income and capital needs of his or her dependents. In order to avoid this, contracts define the death benefit to be the higher of the original death benefit or the amount needed to meet IRS guidelines. These tax advantages can be used for either... Education planning - the cash value of a VUL can be used to help fund children's education, as long as the policy is started very early. Other alternatives for those in the 34% tax bracket that own their own companies would be to consider SEP IRAs, company 401ks or retirement arrangements from a company perspective, or to incorporate and consult a tax specialist. Complexity - the VUL is a complex product, and can easily be used (or sold) inappropriately because of this. Securities offered by Investment Distributors, Inc. (IDI) the principal underwriter for registered products issued by PLICO and PLAIC, its affiliates. Policy administrative expenses and costs of insurance may increase at the company's whim, subject to a contractual maximum. Cash outlay - the cash needed to effectively use a VUL is generally much higher than other types of insurance policies. In a VUL, the cash value can be invested in a wide variety of separate accounts, similar to mutual funds, and the choice of which of the available separate accounts to use is entirely up to the contract owner. AflacAflac has a straightforward online quoting tool that can give you a sense of how much you will … Retirement planning - because of its tax-free policy loan feature, the VUL can also be used as tax-advantaged income source in retirement, assuming retirement is not in the near future and the policy is not a modified endowment contract. The maximum cash value is determined to be a certain percentage of the death benefit. Taxes are the main reason those in higher tax brackets (25%+) would desire to use a VUL over any other accumulation strategy. However, some participating whole life policies offer riders which specify that any dividends paid on the policy be used to purchase "paid up additions" to the policy which increase both the cash value and the death benefit over time. Each of these features can be achieved through other means. Financial protection - as with all life insurance programs, VULs can be used to protect a family in the case of a premature death. As mentioned above, permanent life insurance provides a death benefit you can leave to … Protective and Protective Life refers to Protective Life Insurance Company (PLICO) located in Nashville, TN and its affiliates, including Protective Life & Annuity Insurance Company (PLAIC) located in Birmingham, AL. By allowing the contract owner to choose the investments inside the policy the insured takes on the investment risk, and receives the greater potential return of the investments in return. the cash value would equal the death benefit). These are the features typically marketed by insurance companies, however the VUL in most cases will limit the insured to being able to take advantage of only one of these features listed. Variable life insurance is a type of permanent life insurance that has the ability to accumulate cash value while providing variety and control over professionally managed investment options. Also, putting money into a VUL can be used to help children qualify for federal financial aid, since the federal government does not consider the cash value when calculating EFC (. For information about Protective Life and its products and services, visit www.protective.com. Variable universal life (VUL) insurance policies offer subaccount choices that allow clients to invest directly in the market — providing unlimited growth potential with added investment risk. Companies and organizations linked from Learning Center articles have no affiliation with Protective Life or its subsidiaries. VUL is relatively complex compared to traditional Whole Life or Term Life. Variable universal life insurance is permanent life insurance—it remains in force for the policyholder's whole life. The tradeoff for this growth is the investment risk – including the potential to lose cash value when markets perform poorly. Insurance and Annuities are:  Not a Deposit | Not Insured by any Federal Government Agency | Have no Bank or Credit Union Guarantee | Not FDIC/NCUA Insured | May Lose Value. This premium carries different names from different insurers, one calling it the guideline maximum premium. Separate accounts are organized as trusts to be managed for the benefit of the insureds, and are so named because they are kept 'separate' from the 'general account' of the life insurance company. Please visit our Privacy Policy for more information about our information practices, including information about your privacy choices. So if you want a permanent life insurance policy that lets you make your own investment choices within your policy, consider variable universal life insurance (VUL). Each company is solely responsible for the financial obligations accruing under the products it issues. The loss and gain of the investment fund mainly depends on the stock market flow. Universal and variable life insurance policies, like whole life, combine life insurance protection with the opportunity to build cash value on a tax-favored basis. To add more confusion the seven-year MEC premium level cannot be paid in a VUL every year for 7 years, and still avoid MEC status. Because of its cash value potential, a VUL can be a way for you to complement your retirement nest egg, while at the same time, have the life insurance coverage you need. If the 7 year level guideline premium is exceeded, then the policy becomes a MEC. Variable Universal Life (VUL) is defined as a permanent type of cash value life insurance policy, in which the cash value can be invested into different accounts consisting, for example, of stocks, bonds and mutual funds. The examples and perspective in this article, Learn how and when to remove this template message, https://www.irs.gov/businesses/small/article/0,,id=164871,00.html. Neither Protective Life nor its representatives offer legal or tax advice. Universal life, along with variable and whole life, are the three amigos in the world of cash value life insurance. Therefore, these policies are sometimes referred to as flexible premium variable life insurance. You can also pay a larger amount in premiums if you choose to do so. The 'variable' component in the name refers to this ability to invest in separate accounts whose values vary—they vary because they are invested in stock and/or bond markets. With most if not all VULs, unlike whole life, there is no endowment age (the age at which the cash value equals the death benefit amount, which for whole life is typically 100). All Learning Center articles are general summaries that can be used when considering your financial future at various life stages. The combination over the years of no endowment age, continually increasing death benefit, and if a high rate-of-return is earned in the separate accounts of a VUL policy; this could result in higher value to the owner or beneficiary than that of a whole life policy with the same amounts of money paid in as premiums. Variable universal life insurance … Variable universal life insurance policies have the cash value structure of variable life insurance, but you can use the cash value to pay premiums. And the chance to take advantage of growth when the market is strong. The most efficient policy in terms of cash value growth would have the maximum premium paid for the minimum death benefit. Universal life insurance is a type of permanent life insurance with a cash value that grows based on the current interest rate set by the insurer. Variable universal life is a type of permanent life insurance policy with features that include cash value, investment variety, flexible premiums and a flexible death benefit. We encourage you to consult with your financial adviser and legal or tax adviser regarding your individual situations before making investment, social security, retirement planning, and tax-related decisions. If investments made in the separate accounts out-perform the general account of the insurance company, a higher rate-of-return can occur than the fixed rates-of-return typical for whole life. Prospectuses for Protective Variable Universal Life policies may be obtained by contacting PLICO at 800.265.1545. A MEC still receives tax free investment returns, and a tax free death benefit, but withdrawals of cash value in a MEC are on a 'LIFO' basis, where earnings are withdrawn first and taxed as ordinary income. Internal Revenue Code section 7702 sets limits for how much cash value can be allowed and how much premium can be paid (both in a given year, and over certain periods of time) for a given death benefit. If the maximum premium is exceeded the policy no longer qualifies for all of the benefits of a life insurance contract and is instead known as a modified endowment contract or a MEC. Here, we're looking at the basics of a variable universal life (VUL) insurance policy that includes what it is, how it works, and a few of the pros and cons. Ranges from 30 % or so for young insured persons, declining to 0 % for those reaching 100. 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