An Intro to Variable And Variable Universal Life Insurance

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Variable and Variable Universal Life Insurance

Welcome to an introductory overview on what allied health professionals should know about variable life insurance and variable universal life insurance. 

The initial purpose of this article was to introduce readers to the option of variable life insurance. However, as astutely pointed out by CNN, most variable life insurance policies on the market today are actually variable universal life insurance policies. This can be easily confirmed if you take a moment to perform a quick internet search. 

Therefore, it only seems fitting to cover variable universal life insurance in this article in addition to variable life insurance.

However, to understand variable universal life insurance, you must first understand variable life insurance.

To help you better determine if one of these policies may be right for you, this article will first  provide you with information on variable life insurance and then subsequently cover variable universal life insurance as well. 

Let’s get started.

WHAT TYPE OF INSURANCE IS VARIABLE LIFE INSURANCE?

The two major categories of life insurance are term life insurance and permanent life insurance. Variable life insurance, as noted by the Insurance Information Institute, is a type of permanent life insurance.

As pictured below, the permanent life insurance categories include whole life insuranceuniversal life insurance, and variable life insurance. 

Life Insurance

These types of permanent life insurance have some major aspects in common. Therefore, reading Similarities Between Types of Permanent Life Insurance prior to continuing with this article will help you better understand the unique aspects of variable life insurance when reading this article. 

WHAT ARE THE DEFINING CHARACTERSITICS OF VARIABLE LIFE INSURANCE?

Premium:

All of the major types of permanent life insurance require that a premium be paid to keep the policy in force. Part of this premium payment goes towards covering expenses and the rest goes into your cash value account. 

Guardian Life Insurance Company of America explains that the premiums with variable life insurance are level, like with whole life insurance

For more information on permanent life insurance premiums, be sure to read Similarities Between Types of Permanent Life Insurance.

Investment Options:

The California Department of Insurance explains how having more options to invest your cash value account is an aspect that differentiates variable life insurance from whole life insurance and universal life insurance

These options include the ability to invest in one or both of the following:

  1. Sub-accounts
  2. Fixed accounts 

As described by the Financial Industry Regulatory Authority (FINRA), a government-authorized not-for-profit organization dedicated to regulating the broker-dealer industry, sub-accounts are designed to be similar to mutual funds.

In contrast, the U.S. Securities and Exchange Commission explains that fixed accounts provide a fixed return at a pre-determined rate.

You can choose to invest all of your cash value account in one of these options or can you choose to diversify your cash value account between both options.

The prospectus for a variable life insurance policy will list the investment options available within the policy. For example, Northwestern Mutual lists 27 investment options in its Variable Life 2020 Annual Report.

Having more investment options than a whole life insurance policy or a universal life insurance policy provides can sound appealing. However, keep in mind that there are many more options that exist when investing money outside of a variable life insurance policy. 

For instance, compare having just the 27 investment options referenced in the Northwestern Mutual Variable Life 2020 Annual Report to all of the investment options the U.S. stock market has to offer.

Rate of Return:

Oftentimes greater potential rewards come with greater potential risk. 

The increased investment options that a variable life insurance policy affords you can provide the opportunity for potentially greater cash value account growth. 

Correspondingly, though, there is also greater investment risk.

Ultimately, your return will be influenced by how well your investment choices perform.

Expenses:

Under the heading Variable Life Insurance Fees and Expenses, the U.S. Securities And Exchange Commission does a wonderful job of outlining many of the potential expenses you can expect with a variable life insurance policy. 

When comparing variable life insurance to other permanent life insurance options such as whole life insurance or universal life insurance, a few aspects unique to variable life insurance are worthy of mention. 

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While variable life insurance does provide you with increased investment options for your cash value account, these investment options also come at a price.

First, each of these investment options has its own fee, comparable to the expense ratios found with mutual funds. The amount of fees that must be paid are commonly referred to in terms of basis points, where one basis point is equivalent to 0.01% of the fund’s total assets, per year.

For example, if the expense ratio for a fund is 0.50%, then every year the investor must pay $5 for every $1,000 invested or $50 for every $10,000 invested.

Northwestern Mutual lists illustrates how much a variable life insurance policyholder should expect to pay in expense ratio fees. On pages 1-3 of its Variable Life 2020 Annual Report, expense ratios range as high as 0.92%.

In comparison, the commonly invested in Vanguard Total Stock Market Index Mutual Fund (VTSAX) has an expense ratio of just 0.04% and the also commonly invested in Vanguard Total Stock Market Index Fund ETF (VTI) has an expense ratio of only 0.03%.

While the difference between the expense ratios found with Northwestern Mutual and those found with Vanguard may not seem large, the cost adds up quickly when investing for many years. You would do well to remember this expense when determining just how much money your cash value account’s investments actually make.  

Second, the investment options a variable life offers are SEC regulated. This can make managing the variable life insurance policy more expensive.

The life insurance company often passes on this increase in cost on to policyholders in the form of higher administrative fees.

Death Benefit:

All of the major types of permanent life insurance offer a death benefit. For a closer look as to what a death benefit is, be sure to read Similarities Between Types of Permanent Life Insurance.

When it comes to variable life insurance, several different death benefit options can be offered. The three death benefit options described by the U.S. Securities And Exchange Commission below are the most common:

1. Level Death Benefit

The death benefit that would be provided to your beneficiaries is referred to as the face amount or face value of the policy since this value is typically defined in the policy’s paperwork. As the term “level” implies, this type of death benefit remains the same in value during the duration of the policy. 

2. Face Amount Plus Cash Value Account

This more expensive death benefit option provides your beneficiaries with both the face value of the policy along with the amount in the cash value account. 

3. Face Amount Plus Premium Payments

This death benefit option provides your beneficiaries with both the face value of the policy along with the amount of premium payments you contributed to keep your policy in force. 

Since only a portion of your premium payments actually go into your cash value account while the rest goes towards paying for keeping your policy in force, this third option can actually provide your beneficiaries with even more money than the second option. However, that is why it is typically the most expensive option out of these three commonly offered options.

It is also important to address the possibility of a guaranteed death benefit.

A guaranteed death benefit is an amount of money provided to your beneficiaries no matter the circumstance. 

Not all variable life insurance policies offer a guaranteed death benefit. Some life insurance companies do offer guaranteed death benefit, while others may offer an option to add this on if an additional expense is paid. 

This is important because, if you fail to make your premium payments, then money from your cash value account will need to cover the necessary policy expenses to keep your variable life insurance policy in force. However, if your investment selections for your cash value account perform poorly so that your cash value account cannot cover the policy’s expenses, then your policy can lapse and you will then lose your death benefit. If a minimum death benefit has been guaranteed, though, then at least that amount of money will still be provided to your beneficiaries upon your passing.

Cost of Purchasing a Policy:

As explained by Mutual of Omaha Insurance Company, the cost of purchasing a permanent life insurance policy depends on factors including your age, your health, how much life insurance coverage you are looking to purchase, and the type of permanent life insurance policy you’re are looking to purchase.

Policygenius, an online life insurance broker, estimates that the cost to purchase a variable life insurance policy is comparable to a whole life insurance policy, but still as much as ten times more expensive than the cost of purchasing a term life insurance policy.

WHAT ABOUT VARIABLE UNIVERSAL LIFE INSURANCE?

Variable universal life insurance is a type of life insurance that can be categorized in more than one way.

As noted in my previous article on universal life insurance, variable universal life insurance can be categorized as a type of universal life insurance.

Variable Universal Life Insurance

It can also be categorized as a type of variable life insurance.

Variable Universal Life Insurance 1

Or, as listed by the Insurance Information Institute, variable life insurance can be considered its own category of permanent life insurance altogether.

Variable Universal Life Insurance 2

Premium:

Characteristic of the previously covered universal life insurance, The Northwestern Mutual Life Insurance Company describes how variable universal life insurance allows you to change the amount of your premium payments at will

This allows you the opportunity to increase your premium payments if you want to get more money into your cash value account to increase your investment gain potential, or the opportunity to decrease the amount of premiums you must pay if you find yourself low on cash. 

Allstate Insurance Company elaborates that you can even stop paying premium payments altogether as long as you have enough money in your cash value account to cover the minimum fees to keep the policy in force.

Death Benefit:

Meanwhile, Northwestern Mutual reveals that the death benefit can change depending on how much your cash value account grows or decreases based on your investment choicesIf you make poor investment choices, then you can hypothetically end up with no death benefit.

Investment Options:

Allstate advertises how, like variable life insurance, variable universal life insurance policyholders are provided with increased investment options via subaccounts

The nonprofit Life Happens also explains that you can move money around between these accounts tax-free, allowing for greater control over your investments. However, the number of times with which you can do this can be limited.

Rate of Return:

Again, like variable life insurance, the increased freedom of investment choice found with variable universal life insurance will require more active management on your part because poor investment choices could lead to a decrease in returns

Expenses:

Unfortunately, expenses are still chipping away at your potential gains. 

Moreover, Protective Life Insurance explains that these fees are more expensive compared to universal life insurance. FINRA elaborates that, as with variable life insurance, this is because the investment choices that variable universal life insurance offers are actually securities so the life insurance agents that manage them must be registered with the Securities and Exchange Commission (SEC).  

FINAL THOUGHTS. . .

Overall, both variable life insurance and variable universal life insurance both offer more investment options than their whole and universal permanent life insurance counterparts. This can make these types of permanent life insurance more appealing options.

However, there are additional expenses to keep in mind that chip away at the potential increased upside of having these investment options.

Additionally, with increased potential reward comes increased potential risk, where your policy’s cash value investment could perform poorly. Such a poor return could decrease the value of your cash value account to a point where it is unable to cover your premium payments and thereby jeopardize your ability to keep the policy in force. If you do not have a guaranteed death benefit secured, the death benefit can then be lost.

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