Alternatives to Variable and Variable Universal Life Insurance

Variable Life (VL) is the insurance industry’s answer to the “buy-term-and-invest-the-difference” strategy. It provides investment options similar to those available from mutual funds, but wrapped within the insurance policy. The loadings and expense charges in the VL policy typically exceed the combined loadings and expense charges of a buy-term-and-invest-in-a-mutual-fund strategy. However, investment earnings within the policy are tax deferred and beneficiaries receive death proceeds tax-free. In contrast, mutual fund dividends and realized capital gains are taxable when received or recognized. For long-term insurance/investment needs, the benefit of a VL policy’s tax deferred accumulation will typically overcome the cost of the higher loadings and fees.

A policyowner can configure a VUL policy’s premium payments and death benefits to resemble virtually any type of life insurance policy, from annually renewable term life to single premium whole life. As a practical matter, insurers issue most VUL policies with target premiums at least equal to a lifetime payment plan of insurance. Consequently, any other type of policy that meets a policyowner’s needs may be a suitable and, perhaps, preferable, alternative if the policyowner does not desire the VUL’s premium and death benefit flexibility or the policyowner does not wish to bear all the investment risk. However, a number of other types of policies or strategies offer some of the features of VUL and not others, if policyowners only desire certain features.

  1. Traditional Universal Life – UL offers the same premium and death benefit flexibility as VUL, but it also provides a minimum cash value guarantee. If the insurer’s general portfolio has the risk and return characteristics desired by the policyowner, UL may be a better alternative than VUL. Policy loadings and expenses generally are lower on UL policies than on VUL policies.
  2. Adjustable Life (AL) – AL combines elements of traditional, fixed premium ordinary life insurance and the ability, within limits, to alter the policy plan, premium payments, and the face amount. Policyowners may view AL as VUL without the investment options.
  3. Flexible Premium Variable Annuity (FPVA) combined with term insurance – A combination of a FPVA with level term can generate cash value accumulations and death benefit levels similar to VUL under option B. A FPVA combined with a decreasing term policy is similar to VUL under option A. The FPVA, however, has less favorable tax treatment for withdrawals and loans than a VUL policy.


Many life insurance companies, including some of the largest, are marketing variable life products. Most of the major stock brokerage firms also market variable life products. Agents who sell variable life products must be properly licensed to sell security products.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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