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  • Differences between variable, variable universal life insurance
  • July 12, 2013
  • Tony Steuer

    By Tony Steuer, CLU, LA

    Variable life and variable universal life are difficult policies to understand. Let’s simplify them here.

    The owner of any variable life insurance policy should first have an understanding of the stock or bond markets and their inherent risk. All policy owners should also understand that the investment component of the policy is different than the life insurance component.

    Both variable life and variable universal life provide a death benefit and a cash value or sub-account, which will vary in value depending upon the performance of an underlying portfolio of investments, hence the word “variable” in the name of each.

    Variable life and variable UL policies can be fairly complex process. If you cannot or do not want to personally deal with it, seek out additional help.

    Insurance companies invest the premium dollars as part of the company’s so-called general account and then credits the policy owner with an interest rate based upon the company’s investment results.

    In other words, the insurance company bears the capital risk inherent to investing and credits in-force UL policies with a declared interest base on the company’s investment results.

    There is no direct link between the company’s investment portfolio and the declared interest rate on UL policies. Buyers of UL policies should focus on the guaranteed rate of return, not a projected or non-guaranteed rate of return.

    All buyers of such policies are well advised to obtain an “illustration”, or if the policy is already in-force “in-force illustration”, which will help them see and understand what is being guaranteed in terms of account growth.

    However, there is a relationship between what the company earns on its investments and the interest it credits to UL policies, which is an indirect link.

    Variable life and variable UL policies invest the cash value bucket in a variety of stock or bond investments, which the policy owner chooses from. These are usually referred to as investment sub-accounts. Therefore, people who do not understand stock market or bond market risk should not buy or hold UL policies.

    There is in fact a direct link between the performance of the investment sub-accounts and the amount earned on the cash value bucket.

    For example, if the policy owner chooses one or more sub-accounts that are invested in the stock market, and the market drops, the policy may be inadequately funded and the policy owner will have to put in additional funds to keep it in-force.

    On the other hand, if the stock market does well, the earnings on the cash value bucket may well exceed considerably the amount that would be earned on the cash value bucket.

    Usually, the policy owner has a choice of investment sub-accounts ranging from conservative (bonds or money market funds) to aggressive (growth-stock funds). Both variable life and variable UL life must be sold, by law, with a prospectus, which you should read up on before purchasing one of these policies.

    The prospectus is a lengthy document, which is tedious to pore through. Nonetheless, it will disclose vitally important information that will affect the policy’s future performance.

    If you cannot or do not want to personally deal with it, it is essential that you seek advice from someone who is qualified to help you choose the right policy.

    Because of the direct link between performance of the investment sub-account and cash value bucket, the cash value of a variable life/variable UL life policy is not guaranteed and the policy owner bears the risk.

    However, by choosing among the available fund options, the policy owner can create an optimum allocation of funds to the available investment sub-accounts in order to best meet the stated objectives and risk tolerance.

    Good investment performance leads to higher cash values, which ultimately leads to higher death benefits.

    On the other hand, poor investment performance leads to reduced cash values and death benefits. Some policies guarantee that death benefits cannot fall below a minimum level.

    When you are discussing the possibility of purchasing a variable life or variable UL policy, you will be provided with a proposal and the prospectus. Because the policy owner decides how the cash value bucket will be invested, there are more choices to make than on a UL policy—and more things that can go wrong.

    On the other hand, the policy owner has more control over the cash value bucket.

    Keep in mind that taking out a loan puts the policy at much higher risk of lapsing prematurely. A loan can also result in adverse tax consequences under certain circumstances.

    A variable life or variable UL policy may be surrendered for its cash value at any time and the policy owner also had the option of exchanging the policy for an annuity contract.

    There are many factors that affect the performance and well being of a variable life or variable UL policy.

    Please note that this is not investment advice and is strictly advice from the life insurance perspective. For advice on the investment accounts, please consult a properly licensed financial/investment adviser.

    If you seek additional information about these policies, please email me at

About Tony Steuer

Noted insurance author Tony Steuer has spent over 25 years in the life insurance industry. Steuer’s leadership roles include serving on the California Department of Insurance Curriculum board and the National Financial Educator's Council Curriculum Advisory Panel as well as having served as President of the San Francisco Chapter of the American Society of CLU & ChFC, President of the leading Life Insurance Producers of Northern California, and as a board member of the San Francisco Life Underwriters Association. Mr. Steuer is the author of Questions and Answers on Life Insurance: The Life Insurance Toolbook, The Questions and Answers on Life Insurance Workbook and The Questions and Answers on Disability Insurance Workbook - the first two were awarded the “Excellence in Financial Literacy (EIFLE) Award from the Institute of Financial Literacy. Steuer holds a Chartered Life Underwriter (CLU) designation and also holds the Life and Disability Insurance Analyst License, a designation that is held by less than thirty people in California.

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Questions & Answers on Life Insurance by Tony Steuer, CLU, LA, CPFFE is licensed under a Creative Commons Attribution 3.0 Unported License.

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