How Variable Universal Life Insurance Works

Sean McGinn is an assistant director of Product Positioning in the Insurance Solutions department at Northwestern Mutual.

When you're looking to protect your family's financial well-being, life insurance can be important. So, you want to make sure you pick the right type. As you search online and talk to people, you might hear about variable universal life insurance. This type of insurance stands out for its flexibility and potential for investment growth.

In this article, you’ll learn about variable universal life insurance—including how it works and how it can fit into a comprehensive financial plan. And you’ll see suggestions for when you should review your policy.

First, variable universal life insurance is a type of permanent life insurance. Two great things about permanent life insurance are a death benefit that never expires and the tax-advantaged way it builds what’s called “cash value.” Its structure allows you to protect your family today, plan for your legacy and accumulate funds that you can use at any time for any reason. This structure makes permanent life insurance one of the most flexible financial tools available.

And variable universal life insurance is a type of universal life insurance. That gives you flexibility when it comes to how much you pay in premiums over time and the amount of your death benefit. What makes a variable universal life insurance policy different from a traditional universal life policy is that you have more control in determining how your cash value is invested.

Let’s look at more of the features of this type of insurance.

6 features of variable universal life insurance

1. You have the flexibility to adjust the premium year to year. Variable universal life insurance allows you to adjust the amount of your premium payment within certain limits rather than having a fixed payment each year. Sometimes, you want to pay more into the policy than your minimum premium requires. That way, you’ll build more equity. But say you need money for college, change jobs or don’t get a large bonus, and you want to spend less on your premiums. You and your advisor can look at your policy to see how much you need to add that particular year.
2. Your coverage is designed to last your whole lifetime. Unlike term life insurance, which will end at some point in the future, a variable universal life insurance policy will provide coverage for your entire life (as long as you pay sufficient premiums to keep your coverage active).
3. Your policy accumulates cash value that grows tax-deferred. Most of your premium funds your accumulated cash value, which can grow over time based on the performance of its underlying funds. This accumulated cash value grows tax-deferred. This means you won’t pay tax on the growth while the cash stays within your policy.
4. You choose where to allocate some of your money. With variable life insurance, you control how most of your premium is invested into diversified options, including exposure to the stock market. You can select each investment option, or you can pick a pre-programmed option or “model portfolio” to match how much risk you’d like to take on. Your investment decisions should always be backed by a strategy that fits your specific situation.
5. Your death benefit and cash value fluctuate with the performance of the investment options you choose. In good times (known as bull markets), variable universal life insurance may generate more return for your death benefit and larger accumulated value than a more traditional policy would. But since markets rise and fall, you risk losing value in bear markets. It’s important to work with a professional who can advise you on your policy and help you see how it fits alongside other financial tools.
6. You can access your cash value. The cash value of your life insurance becomes an asset that you can use at any time for any purpose.¹ When accessing leverage your policy while you’re alive. Variable universal life gives you a few options:

• Take a loan against your policy. For any reason, you can take a loan against your policy. Repayment is flexible, but interest will accrue on the loan. It can be a tax-advantaged way to access your cash value. As long as the policy remains in force, you won’t pay any tax from growth in it.
• Use your policy as collateral for a loan from your bank. The policy becomes security in case you default on the loan. You assign ownership of the policy to the bank while the loan is outstanding, and you continue paying premiums. Before using this strategy, make sure your loved ones will have enough money if you unexpectedly pass away. The death benefit would repay the loan, and any remaining death benefit would go to your beneficiaries.
• Withdraw a portion of your accumulated cash value. When you withdraw from your policy, you are permanently reducing a portion of your death benefit. The withdrawal means you can keep some life insurance in place while walking away with money to spend any way you’d like. This can also be helpful when it comes to taxes. That’s because when you withdraw from a policy, you’ll owe ordinary income tax only for any cash value above the money you paid in (or “basis”).
• Surrender your entire policy. In this case, you can take all the accumulated cash value in your policy, but you also give up your life insurance. Your family won’t receive a death benefit from the policy when you pass away. If your cash value is worth more than your basis, you’ll owe ordinary income tax on that amount.

If you’re thinking about using your policy’s value while you’re alive, talk with your financial advisor. They can help you think through the best options for your situation.

Is variable universal life insurance the same as variable whole life insurance and universal life insurance?

No; within the name, “variable” refers to the aspect of the insurance that gives you more flexibility with how your cash value and most of your premium are invested. “Universal” refers to the flexibility with premium payments and death benefit. Let's take a closer look at how these three policy types stack up.

A policy can get even more specific with “survivorship variable universal life.” This type of coverage insures two lives—often married couples or business associates. Survivorship variable universal life can be an efficient way to plan for estate taxes that will be paid by heirs or to help provide funds for business continuity.

When to review your variable universal life insurance

A variable universal life insurance policy shouldn’t be “set it and forget it.” Once you own the policy, make sure you’re reviewing it regularly and talking with an expert. Here are key times you may want to check over your policy and its investment options.

• During an annual review with your advisor: One of the great benefits of variable universal life insurance is its flexibility. But that also means that you need to make sure you’re managing your premium payments well. And you’ll need to keep on top of your investment choices and occasionally reset, or “rebalance,” your investments. It’s good to check in at least once a year with your financial advisor.
• When you reach a milestone: A common time to review variable universal life insurance policies is when you get closer to retirement. It is natural that as you age, you want to be more conservative with the dollars you’ve earned. And it’s always a good idea to review your life insurance when you have a major life event such as marriage/divorce, the purchase of a home or the birth of a child.
• When you update your estate plan: The person you list as your life insurance beneficiary overrides your will. So, when you update your will, it’s a good reminder to look at other financial tools to make sure the beneficiaries are listed correctly.

After getting to know you, a Northwestern Mutual financial advisor can help you find policies to fit you and your family. They’ll also show you how life insurance can work with other financial tools to protect and grow your money—and boost your financial plan.

Depending on the performance of the underlying investment options, the accumulated value available for loans and withdrawals may be more or less than the total premiums paid. Policy loans or withdrawals may have important tax consequences.

Variable contracts have limitations. You should carefully consider the investment objectives, risks, expenses and charges of the investment company before you invest. A registered representative can provide you with a policy prospectus as well as prospectuses for the funds that will contain the information noted above and other important information that you should read carefully before you invest or send money.

It’s important to remember that all investments carry some level of risk. No investment strategy can guarantee a profit or protect against a loss.

Issuer: The Northwestern Mutual Life Insurance Company, Milwaukee, WI.

Principal Underwriter: Northwestern Mutual Investment Services, LLC (NMIS) (securities), subsidiary of NM, registered investment adviser, broker-dealer, member FINRA and SIPC.