Variable Life Insurance vs. Variable Universal Life Insurance: What’s the Difference & Which One Should You Get?

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Updated: May 22, 2024

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Variable life insurance (VLI) and variable universal life insurance (VUL) are permanent life insurance options with an investment component. The primary difference lies in their flexibility and control.

VLI offers a guaranteed minimum death benefit and fixed premium payments, making it ideal for those seeking stability and predictability in their insurance coverage. VUL, on the other hand, allows for adjustable premium payments and a flexible death benefit, catering to individuals who want more control over their insurance and investment options. Each type is best suited for investment-savvy, high-income earners who are comfortable with a certain level of risk in their insurance plans.

Key Takeaways

Variable life insurance offers consistent premiums and a secure death benefit, making it a solid choice for customers who value financial predictability and security.

Variable universal life insurance is characterized by its adjustable premiums and adaptable death benefits, catering to those who prefer investment flexibility and personalization in their policy.

Both types of life insurance are suitable for high-income, market-savvy individuals or those with an advisor. For most, term life insurance is recommended for its cost-effectiveness, with a separate investment of savings.

Difference Between Variable & Variable Universal Life Insurance

The primary distinction between variable life insurance (VLI) and variable universal life (VUL) insurance lies in their flexibility and potential for growth.

VLI offers a more stable approach with the ability to increase the cash value of the death benefit but maintain the same premiums, providing a measure of predictability.

VUL insurance allows for more dynamic management, offering the option to adjust the premium and death benefit up or down. However, this flexibility comes with a trade-off. While potentially higher, the cash value in a VUL account is subject to market fluctuations that can impact the death benefit.

Variable vs. Variable Universal Life Insurance

Variable Life Insurance
  • Has a guaranteed minimum death benefit
  • Can add cash value or premiums paid to increase the death benefit
  • Market losses can lower the death benefit
  • Investments can accelerate cash value growth
  • Can have higher management fees
  • Has fixed premium payments
Variable Universal Life Insurance
  • No guaranteed death benefit
  • Can lower or raise death benefit as life needs change
  • Cash value growth is slower and not guaranteed
  • May have more manageable fees
  • Has adjustable premium payments

While both VLI and VUL fall under the category of permanent life insurance, they represent distinct policies. Variable life insurance and variable whole life insurance differ from universal life policy, which provides a guaranteed death benefit with adjustable death benefits and premium payments. Despite offering higher cash value accumulation potential, UL may experience cash value losses, reducing the death benefit.

Features of Variable Life Insurance vs. Variable Universal Life Insurance

Variable Life Insurance
  • Length of Coverage: As a permanent life insurance policy, a variable life insurance policy is designed to last your lifetime as long as premiums are paid.

  • Cash Value: This policy has high earning potential but can also lose cash value depending on market fluctuations in the sub-accounts. Cash value grows tax-deferred, but removing cash can trigger a taxable event.

  • Death Benefit: The death benefit has a guaranteed minimum amount determined at the start of the policy, which is safe from market fluctuations. You can also choose a face-value death benefit option, which is the face value amount plus cash value or face value amount plus premiums paid. Choosing the latter two may result in a higher premium for the life of the policy.

  • Premium Payments: Premium payments are fixed from the start of the policy. Failing to make the agreed-upon premium payments could cause the policy to lapse.

  • Dividend Eligibility: Although this is a permanent policy, it is not eligible for dividends, even when placed with a mutual insurance company that participates in dividend disbursement.

  • Rider Eligibility: This policy is eligible for riders such as the accelerated death benefit rider. However, rider availability can vary by carrier and policy plan details. Adding riders will likely increase the premium amount.

  • Use for Estate Planning: Out of the two variable life insurance policies, this policy is better for estate planning, as it has a guaranteed minimum death benefit your beneficiary can depend on.

Variable Universal Life Insurance
  • Length of Coverage: VUL is a permanent life insurance policy with continuous premium payments required to maintain the death benefit. Changes to the death benefit can affect premiums owed.

  • Cash Value: This variable life insurance policy allows you to choose your investments, which will affect how fast your cash value grows. The cash value growth is tax-deferred until removed, which could trigger a taxable event.

  • Death Benefit: The death benefit usually does not have a guaranteed minimum; it is flexible throughout the policy's life. As life situations change insurance coverage needs, you can increase or decrease the death benefit, which will likely affect the premium amount owed. The policy does not have the option to include the cash value or paid premiums in the death benefit.

  • Premium Payments: Premium payments are flexible and can be adjusted, even when the death benefit is not. This policy has a high chance of lapsing when lowering the premium payments unless the cash account has enough value to offset the lower premium.

  • Dividend Eligibility: This policy is not eligible for dividends, even when issued by a participating mutual insurance company.

  • Rider Eligibility: This policy is eligible for life insurance riders, which can vary by carrier and plan. For example, you may want a rider to cover disability, which requires finding a company that offers it with VUL. You should expect to pay more when adding a rider.

  • Use for Estate Planning: This policy is not ideal for estate planning as it does not have a guaranteed death benefit. Any death benefit or premium changes could cause the policy to lapse.

Variable vs. Variable Universal Life Insurance: Pros & Cons

Understanding the pros and cons of variable life insurance and variable universal life insurance is essential for making an informed decision.

Each type offers unique benefits and drawbacks, impacting your financial planning and insurance coverage. Explore these to help you assess which policy aligns with your needs and financial goals.

Pros and Cons of Variable Life Insurance

  • Guaranteed Death Benefit: Provides a minimum payout upon death, ensuring financial security
  • Fixed Premiums: Offers predictability in budget planning
  • Potential for High Cash Value Growth: Linked to market performance, offering higher growth prospects
  • Market Risk Exposure: Cash value can fluctuate with market changes
  • Higher Management Fees: Typically comes with additional costs for managing investments
  • Limited Flexibility: Does not allow for adjusting premiums

Pros and Cons of Variable Universal Life Insurance

  • Flexible Premiums: Allows adjustment of payments based on financial situation
  • Adjustable Death Benefit: Can modify coverage as personal circumstances change
  • Investment Control: Offers a range of investment options for cash value
  • No Guaranteed Death Benefit: Death payout can vary based on cash value and market conditions
  • Potential for Loss: Market downturns can reduce cash value and death benefit
  • Management: Requires active management and understanding of investment options

Should You Get Variable or Variable Universal Life Insurance?

Choosing between variable life and variable universal life insurance hinges on your financial profile and preferences. Both are suited for those who are investment-savvy and have a higher income, combined with a readiness for risk.

Variable life is an excellent choice if you want a guaranteed minimum death benefit and predictable premium rates. Variable universal life is ideal for those who want more investment control and the ability to change the premium or death benefit.

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    Variable life insurance is best for:

    • High-income earners with maximized savings options
    • People who want death benefit options
    • Someone wanting greater cash value growth potential
    • People who are okay with market fluctuations that can negatively affect death benefits and cash value
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    Variable universal life insurance is best for:

    • High-income earners who have already maxed out other savings options
    • People who want to choose and closely monitor market conditions
    • Someone who wants a flexible premium and death benefit
    • People who understand how death benefits and premium changes can cause the policy to lapse
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Both variable life insurance and variable universal life are best for high-income earners with a deep knowledge of the market and its volatility or an advisor who can manage the account for them.

For most insurance shoppers, we recommend term life insurance because it's the cheapest option, and then investing the premium savings separately. Consider these term life insurance companies when researching your coverage options.

If you still believe permanent life insurance is your best option, you should look at our rankings of the top companies for whole life insurance and universal life insurance to help you make your decision.

How to Find the Right Life Insurance Policy

Finding the right life insurance policy is a vital step in securing your financial future. It involves assessing your specific needs and understanding the various options available.

Assess Your Financial Needs

Begin by thoroughly evaluating your financial circumstances. This includes analyzing debts, ongoing expenses, income stability and the financial needs of dependents. It's essential to consider both current obligations and future goals.

This initial assessment lays the groundwork for understanding the level of coverage required to provide adequate financial security.

Understand Different Types of Policies

Doing your research is critical to understanding life insurance. Familiarize yourself with various policy types like term, whole life, variable life and variable universal life. Each has unique features and benefits that cater to different needs.

For example, term life offers temporary coverage, while whole life provides lifelong coverage and cash value accumulation. Understanding these nuances will help you find a policy that aligns with your personal circumstances.

Consider Your Age and Health

Your age and health status can help determine the type of policy you should choose and the cost of premiums. Generally, younger and healthier individuals qualify for lower premium rates.

It's also important to consider how your current health status might affect your insurance options and costs.

Evaluate Your Investment Goals

For those interested in a combination of investment and insurance, policies like variable life or variable universal life are worth considering.

These policies provide death benefits and include investment components that can grow cash value. Align these features with your long-term investment goals and risk tolerance.

Compare Quotes and Policies

Shop around and compare different life insurance quotes and policies.

Look beyond just the premium rates; consider the benefits, policy exclusions, available riders and the insurance company's financial strength. This will ensure you get comprehensive coverage at a competitive price.

Seek Professional Advice

Although it's optional, consulting a financial advisor or insurance agent can help you navigate your options and provide clarity about each type of policy. They can offer personalized advice, helping you choose a policy that matches your unique financial situation and future goals.

Review and Update Regularly

As your life circumstances evolve — like changes in income, marital status or family size — your insurance needs may also change.

Regularly reviewing and updating your policy ensures it remains aligned with your current financial situation and future objectives.

Compare Life Insurance Rates

Ensure you're getting the best rate for your life insurance. Compare quotes from the top insurance companies.

Frequently Asked Questions About Variable vs. Variable Universal Life Insurance

Determining which is the better option between variable life and variable universal life insurance depends on your personal needs and circumstances. MoneyGeek addressed some of the most common questions about variable life insurance and variable universal life insurance to help you make an informed decision.

What is the difference between variable and variable universal life insurance?
Should I get variable or variable universal life insurance?
Can I lose money with these policies due to market downturns?
How do I manage the investment component of these policies?
Are these policies suitable for short-term coverage needs?

About Mandy Sleight

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Mandy Sleight is a licensed property, casualty, life and health insurance agent with 20 years of experience in the industry. She has worked for major insurance companies like State Farm and Nationwide, and most recently as the Operations Coordinator for a startup employee benefits company.

Sleight holds a business administration and management degree from the University of Baltimore and a master's in business administration from Southern New Hampshire University. She uses her vast knowledge of insurance and personal finance to create easy-to-understand and engaging content to help readers make smarter choices with their budgets and finances.