 Personal Finance PowerPoint Presentation. Variable Universal Life VUL Insurance. Prepare to get financially fit by practicing personal finance. Insurance is part of our long-term risk mitigation strategy where we follow the adage of measure twice, cut once, put in a formal process in place, look in something like set the goals, develop a plan to reach them, put the plan in action, review the results and repeat the process periodically. Most of this information can be found at Investopedia Variable Universal Life VUL Insurance, which you can find online. Take a look at the references, resources, continue your research from there. This by the Investopedia team updated May 23rd, 2022. In prior presentations, we looked at insurance in general. Now we're looking at life insurance. We looked at the two major categories of insurance that you want to be keeping in mind. That being the pure insurance, the term insurance, the permanent insurance. Within the category of permanent insurance, we've got the universal life and the variable universal life insurance. Note that you always want to be comparing and contrasting, or my suggestion would be to compare and contrast to the pure insurance, which would be the term insurance. So what is Variable Universal Life VUL Insurance then? Variable Universal Life VUL is a type of permanent life insurance policy as opposed to the term policy with a built-in savings component that allows for the investment of the cash value. Like standard universal life insurance, the premium is flexible. We talked about the standard in a prior presentation, universal life. VUL, Variable Universal Life Insurance Policies, typically have both a maximum cap and a minimum floor on the investment return associated with the savings component. So now we're thinking about what's going to be the return on the savings component. Remember that when you compare the permanent types of insurance to the term insurance, the term insurance, you're just buying insurance and you always hear the adage of, why don't I just buy just insurance, the term insurance, which is usually cheaper and then invest the difference in something like a savings account or an IRA 401K plan and so on. And usually you want to have some kind of rationale, possibly tax rationale and or more advanced estate planning kind of rationale or some kind of reasoning as to why you would not basically do that. So that's the first thing to kind of keep in mind. If you put the money into the variable universal life, then you've got this cash value component, which is kind of like a savings kind of component. And then there's a question of what might the returns be on that savings component. And here we go. The VUL insurance policies typically have both a maximum cap and minimum floor on the investment return associated with the savings component. So the VUL variable universal life insurance has investment and sub accounts that allow the investment of the cash value. The function of the sub accounts is similar to a mutual fund. So now you're saying is this money just sitting in like a savings account as the cash value of the VUL? Is there some other way I can invest possibly painting it in some way to mutual fund calculation index funds? For example, to vary the returns possibly hopefully increase in the returns. Exposure to market fluctuations can generate significant returns, but but may also result in substantial losses. So clearly if you were to be able to do that, you're going to say, hey, look, if you're if you're holding on to this money, the interest rates are quite low right now. Why don't you invest it or somehow give me a return similar to the stock market as an index fund? That's great because the returns are usually higher, but it also comes of course with added risk factors related to it. That's the pros and cons of investing in the stock market as opposed to say just a savings account or something like that. This insurance gets its name for the varying results of investment in the ever fluctuating market. Well, the VUL variable universal life insurance offers increased flexibility and growth potential over a traditional cash value or whole life insurance policy. Policy holders should carefully assess the risks before purchasing it. How variable universal life VUL insurance works like universal life insurance VUL insurance combines a saving component with a separate death benefit. So the death benefit is kind of like the standard. That's what you're buying with the insurance side of things. And then you've got this kind of saving component to it. This allowing for greater flexibility and managing the policy premiums are paid into the savings component. So for a VUL, that's the variable universal life, then the insurance policy, the savings element consists of separately managed accounts. Referred to as quote sub accounts in quote each year. The life insurance deducts what it needs to cover mortality and administrative costs. The rest remains in the separate accounts to earn further interest to components in a whole life policy. The life insurer assumes the investment risk by guaranteeing a minimum cash value growth. So you have some assurance in terms of what the growth would be and that being for the whole life insurance by separating the savings component and the death benefit component. The life insurer transfers the investment risk of the VUL policy to the insured, which is generally us right. So now we've got this exposure to the fluctuations of the market as you step as you take on that more risk, your potential for growth often goes up with the market fluctuations. But you also have that potential for loss in that case. The insured must assume the likelihood that the separate account may generate negative returns, which will reduce the cash value. So if the market goes down, cash value goes down if it's tied to some kind of market condition. Significant and sustained losses compromise the cash value. So and that's kind of a problem when you're talking of course about insurance, which is there to kind of mitigate against like risk in the future. Obviously we're trying to mitigate against the risk of dying for the life insurance. But now we're taking on a little bit of the market risk, you know, as well. So if things went bad, the market crashed and then, you know, and then we died. That wouldn't be that would be a bad series of events. So as a result, the insured may need to remit higher premium payments to cover the cost of the insurance and rebuild the cash value. So sub accounts, the separate sub accounts is structured like a family of mutual funds. So how is this going to work? Well, now they're going to have to set up kind of the sub accounts, which are kind of like the mutual funds, like possibly index funds, for example, to help tie into the flexibility of the market, which could lead to larger gains, but adds more risk as well. Each has an array of stock and bond accounts along with a money market option. So some policies restrict the number of transfers into and out of the funds. If a policy holder has exceeded the number of transfers in a year and the account in which the funds are invested performs poorly, they may need to pay a higher premium to cover the cost of insurance. Special considerations in addition to the standard administration and mortality fees paid by the policy holder each year, the sub accounts deduct management fees that can range from 0.05% to 2%. So obviously with this more complex kind of structure, you get those fees that are going to be higher. Which again, if you start to think, well, if I'm going to start to have an investment, why don't I just buy the term insurance, which is cheaper, most likely. And then invest the difference into like an IRA or into a savings account, a CD bonds or something like that, because it might be, you might not have the fees and whatnot in the cost that might be associated with it. So again, there might be rationale for that because you might have tax strategies that you're put into play or you might have a state planning strategies, but you always want to be going back to that kind of in your mind. As the base case, which would be buying term insurance for insurance purposes, which is cheaper and then investing the difference when you're trying to put your money somewhere to invest instead of commingling the things, confusing things, unless there's a significant reasons that you would want to confuse things. So because the sub accounts are securities, the life insurance representative must be a licensed producer and registered with the financial industry regulatory authority. That's the FINRA. So the growth of the VUL insurance policy cash value is tax deferred. Policyholders may access their cash value by taking a withdrawal or borrowing funds. However, if the cash value falls below a specified level, additional premium payments must be made to prevent the policy from lapsing. So once again, what is a VUL insurance? VUL stands for the variable universal life, variable universal life insurance. It is a variation on a standard universal life policy that allows for some of the cash value accumulated to be invested into the market and earn a return. So a VUL is VUL a good investment. As an insurance product, VUL may be able to boost returns in the policy during bull markets. However, as a standalone investment, VUL will not be able to match the performance of investing directly in the market. So in other words, because there's fees and whatnot that are going to be related to it. So you got to be thinking, well, why, you know, why exactly? Again, why wouldn't I be purchasing just term insurance and then investing the difference directly into the market? There's got to be some more to it than simply being able to have the flexibility of the market you would think in place, some other strategy involved. So this is because the fees, caps, and the cost of the insurance component will drag down the total return. What can VUL policies invest in? The exact investment options will vary among insurance companies, but almost all of the VUL policies allow investments in stocks, bonds, money market securities, ETFs, and mutual funds, as well as the guaranteed fixed interest options. So these are like the standard kind of stuff. You might be able to invest it in like an E-Trade or a Vanguard or with your bank if you have like brokerage kind of accounts and whatnot.