Unlock the tax benefits of variable universal life (VUL) insurance by meeting with an experienced insurance advisor at Monarch Insurance. Contact us today!
Understanding Variable Universal Life (VUL) Insurance
Like any other type of life insurance, variable universal life policies promise to pay beneficiaries – family members, business owners, a trust — a sum of money upon your death. The beneficiaries can use the money, called the death benefit, to pay living expenses, to cover the cost of replacing you as an employee, or just about anything. Life insurance in general is a great way to help life go on without you, keeping your survivors out of financial hardship.
Three things set VUL policies apart from other types of life insurance:
- VUL is permanent insurance. Some types of insurance offer coverage for a certain length of time – say, ten or twenty years. Permanent insurance offers coverage that remains active throughout your life as long as premiums sufficient to keep the policy in force are paid on time.
- VUL is variable insurance, not fixed insurance. The policy owner (and for some policies, their financial advisors) can choose to invest the policy’s value in a menu of different investment subaccounts offered by the insurance company. These investments, which range from money market funds to stock indexes to bond funds, are called subaccounts because they are separate from the insurance company’s own investments. The potential for higher returns over time exists compared to fixed insurance policies.
- VUL is “universal” life insurance, meaning that premium payments are flexible. As long as a minimum amount is available to cover the cost of insurance, the policy will remain in force. A policy owner can adjust the amount they are “investing” into the policy as their financial situation changes, even skipping payments if necessary. Other types of insurance typically require payment of a fixed premium amount – usually monthly or annually.
Potential Negative Aspects of Variable Universal Life (VUL)
- Higher premiums: Permanent insurance policies (including VUL) generally have higher premiums because they offer more than protection – they build cash value over time. Also, since coverage lasts for the life of the insured person instead of for a limited period of time (as with term life insurance), the insurance company will almost certainly have to pay out the death benefit. With term insurance, the insurance company only needs to pay if the insured dies before the term ends.
- Investment risks: While the investment flexibility of VUL could mean higher returns, it is also riskier than fixed insurance. The investments a policy owner chooses may fluctuate – and may lose value or at least underperform compared to how the policy was illustrated at the time of application.
Tax Benefits of a Variable Universal Life (VUL) Policy
Your question might be, “Why would anyone want to invest more in their insurance policy?” And the answer is: taxes. The cash value within a life insurance policy grows tax deferred. Even though it’s invested, growing in value and perhaps earning dividends, those earnings are not subject to capital gains or income tax. All the cash value remains in the policy, earning money – which can add up over the years!
If an owner needs access to the money that’s been paid into a VUL, they can request a withdrawal or a loan from the cash value. Withdrawals and loans are generally tax free, but they may incur (usually modest) fees or interest. Your insurance professional can help you determine the best way to access money from a VUL policy.
How to Maximize Your Tax Benefits with a Variable Universal Life (VUL) Insurance Policy
Type “VUL” into a search engine and you’ll get an overwhelming number of results. Variable policy or not, it’s important to consider many factors in deciding what amount and type of life insurance you need. Some things to consider:
- Your reason why: at your death, what would the benefits cover: replacing your current salary, funding a trust, buying out a business partner? If you are looking to cover these needs and are looking for tax-advantaged investments, a VUL may work for you.
- Amount needed: For a death benefit meant to provide for your family, a good rule of thumb is 8 to 10 times your annual before-tax salary. Many factors can push that number up or down.
- Type of policy: Even among VUL policies, there are several different provisions and riders.
- Amount available for investing: You will want to make sure you invest enough to properly fund the policy and take advantage of the investment opportunity. If you have limited funds or are looking to protect your income rather than looking to invest, then a VUL may not be for you.
Key Takeaways on Variable Universal Life (VUL) Insurance
Variable Universal Life allows the policy owner to choose from among a broader list of investment options – like stock, bond, real estate, and foreign-based investments. Compared to other forms of life insurance, VUL offers more potential earnings on the policy’s cash value – and the potential for less gain as well.
VUL may be particularly suited for individuals who need permanent insurance protection and are also looking for tax-advantaged investments. Any increase in cash value invested in a VUL is not subject to income tax. If a policy owner needs access to that cash value, they can consider a withdrawal or loan – also not subject to income tax.
VUL may not be suited for individuals who are looking for lower premiums versus investment opportunities. If you have limited funds available to pay for life insurance, then VUL is probably not for you.
Variable Universal Life (VUL) Insurance at Monarch Insurance
Some VUL products offer extra features such as long-term care riders, no-lapse guarantees, or return of premium provisions. And all VULs offer different subaccount options. It’s always a good idea to enlist the help of your financial professional when making the decision to buy an investment product such as VUL insurance.
The professionals at Monarch Insurance Partners can help you make that decision. Our broker, Brad Mueller, is licensed and registered to sell variable universal life in addition to other life insurance products. He is happy to meet with you and your current accountant, attorney, financial planner to explain your options. Ask Brad! Schedule a meeting or phone call by clicking here.
Learn more about Monarch on monarchinsure.com or by calling 608-620-0596.
Investing in variable universal life insurance involves risk, including the possible loss of principal. More information on this contract’s underlying investments—and their objectives, risks, charges, and expenses—is in the prospectus. Investors should read and consider the prospectus carefully before investing. Guarantees are based on the claims-paying ability of the issuing company. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Seek the services of an appropriate professional regarding your individual situation.