Legal Definitions - variable universal life insurance

Variable universal life insurance is a type of permanent life insurance policy that combines the flexible features of universal life insurance with investment options chosen by the policyholder.

Like other universal life policies, it offers flexibility in adjusting premium payments and death benefit amounts. However, its distinguishing feature is the "variable" component: the policyholder has the power to direct how the policy's cash value is invested. This cash value is typically allocated among various investment sub-accounts, similar to mutual funds, which can include stocks, bonds, and money market options. The growth of the cash value is directly tied to the performance of these chosen investments, meaning it can potentially grow faster than traditional policies but also carries investment risk, as the value can decrease if the investments perform poorly.

• Example 1: A young professional seeking wealth accumulation and protection.

  Maria, a 32-year-old software engineer, wants life insurance to protect her future family but also sees an opportunity to grow her savings. She is comfortable with market fluctuations and wants control over her investments. Maria chooses a variable universal life insurance policy. She allocates her policy's cash value into several aggressive growth sub-accounts, hoping to maximize returns over the long term. She also appreciates the flexibility to reduce her premium payments temporarily if she decides to take a sabbatical or if her income changes, without losing her coverage.

  This illustrates variable universal life insurance because Maria actively chooses the investment sub-accounts for her cash value (the "variable" aspect) and benefits from the ability to adjust her premiums (the "universal" aspect).

• Example 2: A small business owner planning for retirement and legacy.

  David, a 55-year-old owner of a successful consulting firm, wants to ensure his business partners are financially protected if he passes away unexpectedly. He also wants to build a supplemental retirement fund that he can access later. David has experience managing investments and prefers to have a say in how his money grows. He purchases a variable universal life insurance policy, directing its cash value into a diversified portfolio of sub-accounts that align with his long-term financial goals. He plans to use the policy's cash value to supplement his retirement income or leave a larger legacy to his children.

  This demonstrates variable universal life insurance as David exercises control over the investment allocation of his policy's cash value (the "variable" feature) to align with his financial planning and legacy goals, while also benefiting from the policy's inherent flexibility.

• Example 3: Parents saving for a child's future education while providing security.

  Sarah and Tom, new parents, want to establish a financial safety net for their child while also building a fund for future college expenses. They are financially savvy and understand the potential for higher returns with market-linked investments. They decide on a variable universal life insurance policy. The death benefit provides crucial financial protection for their child. Simultaneously, they invest the policy's cash value in moderate growth sub-accounts, aiming for long-term appreciation that could potentially be used to help fund their child's higher education, understanding that the value will fluctuate with market performance.

  This example highlights variable universal life insurance because Sarah and Tom are actively managing the investment of the policy's cash value (the "variable" element) to achieve a specific financial goal like education savings, alongside the core protection offered by the life insurance.