The term "variable" simply refers to "different investment options." Variable universal-life insurance allows the policy owner to choose how the cash value is invested. Some variable policies have up to 50 different "sub-accounts" from which to choose. These sub-accounts are similar to mutual funds, but have different expenses.
The returns on the cash-value account are income tax free. When the owner uses the growth in the cash-value account to pay insurance costs, he or she is paying for the insurance with before-tax dollars. Premium payments are after-tax dollars (i.e. the owner earns the money, pays taxes on that money, and then pays the premium). This is true of all cash-value life insurance.
Many people felt the returns of standard universal- and whole-life insurance policies were too low. Life insurance was not a good "investment." The cash-value account was not earning a suitable return. Variable life allows these same people to purchase life insurance and choose the investments for the cash-value account of the policy.
Many variable life insurance policies also offer bond sub-accounts. However, unlike fixed whole- and universal-life cash-value accounts, the insurance company does not guarantee these funds, so they can also lose money.
Many variable policies do offer a guaranteed "fixed" account. The guarantees are usually for at least 3 percent or 4 percent.
Past performance is not an indicator of future results, but historically, stock funds have enjoyed strong returns (over 10 percent). If the variable universal-life insurance policy is able to earn strong returns into the future, then the cash-value account will grow at a faster rate. If you have an Option B policy as the cash-value account increases, the death benefit increases and the beneficiary receives that increased amount upon the death of the insured. It could also mean less out-of-pocket premiums for the owner.
Cash Value - The amount of total premiums paid for a policy minus the costs for insurance in whole-, universal-, and variable universal-life policies. The cash value grows tax-free in an insurance policy.
Death Benefit - The total cash payment made to the beneficiary upon the death of the insured.
Insured - The person on whose life the insurance has been purchased. If the insured dies, a death benefit will be paid to the named beneficiary.
Owner - The person or entity who owns the insurance policy. The owner may or may not be the insured. The owner can designate the beneficiary, and is responsible for paying premiums. See Life Insurance: The Impact of Ownership, Virginia Cooperative Extension publication 354-142 , for more information on the impact of ownership.
Premium - The amount billed to the owner of an insurance policy (usually monthly, quarterly, or annually) by the insurance company. In term and whole-life the full premium must be paid to keep the insurance. In universal- and variable universal-life, the amount billed may or may not be a mandatory payment to keep the insurance.
Virginia Cooperative Extension materials are available for public use, reprint, or citation without further permission, provided the use includes credit to the author and to Virginia Cooperative Extension, Virginia Tech, and Virginia State University.
Issued in furtherance of Cooperative Extension work, Virginia Polytechnic Institute and State University, Virginia State University, and the U.S. Department of Agriculture cooperating. Edwin J. Jones, Director, Virginia Cooperative Extension, Virginia Tech, Blacksburg; M. Ray McKinnie, Administrator, 1890 Extension Program, Virginia State University, Petersburg.
May 1, 2009