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Variable Universal Life Insurance, Explained

Key Takeaways

  • Variable universal life is a kind of permanent life insurance. We don’t recommend that because most people only need life insurance while they’re building wealth and have dependents.
  • It includes a cash value account that can be invested in subaccounts, which are like mutual funds.
  • Premiums are adjustable, but your control depends on the success of the cash value account.
  • Returns are not guaranteed, and if your losses are too steep, your premiums will go up.


The first time you hear about variable universal life insurance, you might feel a little confused. Seriously, what is this string of words? We know what life insurance is, but what about variable and universal? Is it like life insurance that morphs to cover any and every situation?

Well not exactly—but it is fair to say that once you understand variable universal life (VUL), you’ll probably agree it’s trying to do too many things at once. Like all universal life insurance, VUL is a mix of insurance and investing. It’s supposed to help you take care of your family and your future. But anytime you hear about mixing insurance with investing, that’s a red flag. The hype is huge, but the price is high and the ultimate outcome is unimpressive.

We’re here to bring the whole concept of VUL back down to earth. Let’s talk about what VUL is, how it works, its pros and cons (a whole lot of those), plus how it stacks up against other kinds of life insurance.

What Is Variable Universal Life (VUL) Insurance?

Variable universal life (VUL) puts two services in a single package:

  • Permanent life insurance with adjustable premiums
  • A cash value account you can access while you’re still alive (We’ll talk more later about why you can’t access it when you’re no longer alive. Just kidding. It’ll be because you’re dead.)


Here's A Tip

We love life insurance (the right kind) and investments (again, when they’re done right). But the only purpose of life insurance is to replace your income when you die. It’s not an investment. That’s why we only recommend term life insurance. It’s cheap and temporary, and all it does is replace your income if you die. (We’ll talk more below about why we always recommend term life over any kind of whole life, including VUL. And by the way, whole life and permanent life are two names for the same type of insurance.)

Like any kind of life insurance, VUL includes a payout. When you die, the payout goes to the beneficiary you name in your policy—but there are some conditions on that.

The marketing for VUL is pretty slick. The insurance companies figure if you’re interested in buying life insurance, you’re probably a planner. And that means you’re likely also interested in retirement planning. So the thinking goes, Why not sell you both at once? That would all be fine if it weren’t for a couple of problems—like the fact that the administrative fees for a VUL will cut into your returns, or how you’ll be paying way more on your premiums than you’d ever pay for term life insurance.


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How Does Variable Universal Life Insurance Work?

As long as you keep paying the premiums on your VUL policy, your coverage will continue. That might sound awesome, but the truth is, you don’t need lifelong life insurance coverage.

If you follow the Ramsey Baby Steps, you can become self-insured long before you die. That means you’ll be debt-free with enough savings to replace your income from your own investments. The day you reach that goal, you can cancel your term life coverage!

VULs build cash value by investing part of your premium into subaccounts that work like mutual funds—the returns you get are based on stock market performance. We’re huge fans of mutual funds because they’re a great way to use the power of the stock market to build wealth for the future—but again, not in combination with life insurance!

While it’s possible to see good returns on your VUL cash value account, the downside is the fees. You’d see way better returns if fees weren’t cutting into your contributions—and there are always fees with any kind of whole life insurance. With a VUL policy, they can be really high. (Another big reason to stay away.)

Here's another big problem with VUL insurance: It’s promoted as a product that helps you hit two goals: replacing your income when you die and helping you build up cash for the future. But if the investments in your cash value account go south for too long (investments do go up and down in value, after all), chances are, you could lose your investment and your life insurance! We’ll explain how in a minute.

Here are some of a VUL’s key features.

Adjustable Premiums

As with other kinds of universal life insurance, the premiums for a VUL are adjustable. The insurance company sets the base rate to cover ongoing costs of your coverage. The rest of your premium gets invested into that cash value account we mentioned.

You get to decide how low or high you want your premiums to be. Feeling flush with cash and hungry for investment growth? You can adjust the premium up so you’re investing more in your cash value account. Or if you’re tightening your budget, you can bring your premiums down—so long as you’re still covering the life insurance costs.

Your premiums can also vary depending on the performance of the subaccounts. For example, if you hit a lucky streak with your returns, that growth can be used to cover some of your premiums, giving you breathing room in your budget. (Phew!)

But there are some hitches to consider. First up, using your cash account to cover premiums takes away from its long-term growth potential. And secondly, returns on a VUL aren’t guaranteed. Imagine if your cash value account growth slows down, or even goes negative. (Yes, this is possible.) The end result will either be higher premiums or a canceled policy if you can’t afford to pay.

Wait, what? You can lose your coverage just like that? You better believe it! Adjustable premiums might sound convenient. But the truth is, they come with huge risks. The fact that they can squeeze your budget or even cause you to lose coverage shows what a poor product VUL is.

Let’s admit that VUL isn’t the most stable way to protect your loved ones or your finances.

Investment Variety and Risk

Speaking of risk, we have to admit we like how a VUL gives you the flexibility to decide how your cash value account is invested (many cash value life insurance policies don’t offer that option). But to repeat ourselves: That’s not a game you want to play with your life insurance. Life insurance and wealth building don’t mix.


As with any investment that’s tied to financial markets, some subaccounts are riskier than others. And some perform better than others. You get to choose which to invest in and how much to invest in each one.

But don’t forget about all the fees that go along with the subaccounts, making growth a challenge. Not all VUL policies have all of these extra costs, but here are some of the fees that come out of your subaccounts:

  • Administration fees
  • Mortality fees
  • Management fees
  • Surrender charge for canceling your policy

That’s a lot of fees. And there are more!

Some VUL policies also place annual limits on the number of times you can transfer money between subaccounts. If you hit your limit, you might be charged another (wait for it . . .) fee to make further transfers.

Good luck earning enough return to recover all the fees! This is yet another reason we recommend buying term life at a way lower price and investing the difference you’ll save in actual mutual funds through your Roth IRA or 401k.


Accessing your cash value comes with some rules. We’ve already mentioned how some VUL policies limit the number of annual cash value transfers you can make. A VUL also allows you to make a withdrawal from the cash value—just remember, though, you’ll have to pay income taxes (and potentially a penalty) on the money you withdraw. And any money you take out will affect the long-term growth of your investment and can reduce the value of your death benefit.

Here’s another way to access your VUL cash value—and it’s truly idiotic. You can borrow money from your own cash value. Debt is never a good idea. But taking a loan against your own money is especially dumb. If you get behind on payments, you risk losing not only what you’ve built up in cash value, but possibly your life insurance coverage too if you can’t cover your premiums.

Death Benefit

You get to choose the face value—the death benefit amount—of your VUL insurance policy. In fact, even after you buy, you have the option of either raising the original death benefit or lowering it. But there are a couple of conditions to keep in mind with that:

  • If you want to raise the death benefit, you’ll likely need to prove you’re in good health (just as you did when you first opened the policy).
  • If you want to lower the death benefit as a way to lower your premiums, you’ll probably be charged surrender fees.

As with any life insurance policy, the beneficiary you name will only get the payout if the policy is in force (aka active) when you die. The chances of that being true are a lot harder to control with a VUL than with term life. We’ve already talked about how your VUL premiums aren’t entirely under your control—and if your investments underperform, those premiums can climb pretty high.

If they rise higher than you can afford, you’ll have to kiss your coverage—and your family’s future payout—goodbye! That’s not the way life insurance is supposed to work.

Do the right thing. Choose term life with a face value worth 10–12 times your annual income. The premiums are locked in for the whole life of the policy and you typically only pay them for 15 or 20 years.

Tax-Deferred Growth

Now, your growth in the cash value account will be tax-deferred—but the same is true of many other kinds of investment accounts. The VUL tax shelter is definitely not enough to justify the premiums and fees you’ll pay to keep the policy in place.


Pros and Cons of Variable Universal Life Insurance

What are the advantages and disadvantages of VUL? To be honest, we don’t see much point at all in buying this kind of life insurance. But sometimes a good old-fashioned pros-and-cons list is the easiest way to understand how a product really works.



Unlike many kinds of permanent life insurance, VUL lets you invest the cash value portion of your premium, and those investments could have a decent ROI.

VUL is way more expensive than term life insurance (and so is every other kind of permanent life insurance).

If you need some budget flexibility, you can lower your premiums and cover the difference with money from your cash value account.

Fees! Lots of them. Super high administrative fees will cut into your returns on the cash value.


If market losses send your cash value account down far enough, your premiums will go up—sometimes way up.


Many VULs include a penalty if you cancel the policy within 15 years of opening it. You could lose 10% or more of your cash value balance.


You can borrow against your cash value balance—which is a really bad idea!


If your cash value dips too low to cover the cost of your life insurance coverage, you’ll either have to cover the cost of your premiums yourself or lose the policy completely.


VUL Compared to Other Life Insurance

Maybe you’re wondering how VUL compares to other kinds of life insurance. The chart below shows the basics of how VUL lines up with several other coverage types. But before you dig into the details, keep these two important points in mind:

  • All forms of permanent life insurance (also called whole life insurance, or sometimes universal life insurance) are pretty bad.
  • We only ever recommend getting term life insurance.

And now, here’s the table:


Term Life

Variable Universal Life

Variable Life

Universal Life

Indexed Universal Life

Death Benefit






Tax Advantages






Less Expensive



More Expensive






Flexible Death Benefit




Minimum Death Benefit





Includes Cash Value Investing






Guaranteed Growth




Variable Premiums






Allows Borrowing







The Truth About VUL

Real talk: VUL isn’t a good idea for you or those you love. Life insurance is meant to replace your income and provide security for your loved ones if you die—it’s not supposed to be an investment. Bringing that into the picture makes insurance way too complicated. Plus, the returns on investment for a VUL are either similar or worse than you’d see in a tax-advantaged retirement account—all while working under the threat of canceling your life insurance if the investments underperform.

With a VUL, we’re basically talking about a product with emotional marketing around two emotional issues: death and family. Everyone wants to protect their loved ones. And everyone knows (sad as it may seem) that none of us are getting out of here alive.VUL marketing takes advantage of those emotions and gets people to sign up for a product that’s way too expensive for the value it delivers. You can save a lot of money by opting for term life insurance and (like we said before) putting your savings toward separate retirement accounts that don’t get hit with endless life insurance admin fees.


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Get Great Term Life Insurance Coverage

Term life insurance costs way less than a variable universal life insurance policy with the same death benefit. That’s because term life is just life insurance. No cash value account with expensive investing or management fees. We always recommend term life insurance over variable life insurance.

And since you’re saving on life insurance, you have more money to invest in retirement accounts like your 401(k) and Roth IRA. That’s how you take care of your life insurance needs and build real wealth!


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