Variable Universal Life (VUL) Insurance: Purportedly Investment and Protection in One, But is it Worth Your Money?

Quite a number of people are clueless about handling their money wisely. So it's also not surprising to find out that many are unaware that they ought to have both protection and investment in their financial mix. 

Financial protection is important because it serves as a sort of cushion if the unexpected happens. 

What sort of unexpected things might I be referring to? 

Well, the most important one that you ought to be protected against is sudden unexpected death. No one can know for sure about when death will come. It would, therefore, be wise to have a life insurance policy as financial protection. 

If you haven't realized how critical protection is for people who depend on you financially, I'd advice to give this a serious thought. 

People are just more interested with investments. They want to grow their money, and that's understandable. 

But for those who do not have life insurance protection yet in their portfolio but is eager to dive into investing their money, they have the option to go for Variable Universal Life (VUL) insurance. 

What exactly are VUL’s?

VUL insurance is a financial product offered by insurance companies. As I have mentioned, it has both a life insurance component and an investment part. This mix can make this product a little complex and difficult to understand. 

But to put it simply, the life insurance component of the product is just like term insurance while the investment part is very similar to mutual funds. With these two components combined, we get a VUL insurance.

So buying this product would mean a little of the amount paid will go to term insurance (which is the cheapest life insurance available) while the rest will be invested in a mutual fund-like investment scheme.

For employees who do not have life insurance outside of their company-provided policies, a VUL insurance could serve as contingency. If the employee loses his job, insurances that are company-provided will stop. So a second life insurance policy would not be such a bad idea especially if the employee also wants to start investing at the same time.

But Is it worth your money?

However, VUL insurance has some distinct disadvantages that should be noted before you decide to buy one. Since part of the money is spent on insurance, it could feel like less money is being invested compared to an ordinary mutual fund. But really, this small amount gives you the advantage of being insured.

The more disconcerting thing about VUL insurance products is their so called “premium charge”. This amount will be deducted from the money you paid to cover the insurance company’s expenses. This would include the hefty sales commission for the agent.

How much is the premium charge?

Simple answer is it is between 5% and 85% of the premium paid depending on the type of VUL. There are two basic types. There’s the regular-pay VUL in which case you pay a specified premium on a regular basis (monthly, quarterly, semi-annual 0r annual). There’s also the single-pay VUL where in you pay one-time.

Regular-pay VUL could charge up to 85% of the premium on the first year. This would decrease on succeeding years until it’s gone by the fourth year or so. 

While the singe-pay VUL, on the other hand, would charge you 5% of the premium. This may seem a lot less but that’s because you only pay one time with a bigger amount.

If you ever heard about cost-averaging, you’d be eager to go for a regular-pay investment. But the amazingly high premium charge on the first few years of your investment would wipe out all possible gains of your investment. 

In fact, your investment fund would not begin to breakeven until the eighth or ninth year. Meaning that the total amount you paid would be more than your investment fund all because of the premium charges deducted. If you needed to withdraw before nine years, you would effectively lose money.

So what’s the verdict on VUL’s?

Many shrewd individuals who know better have said that VUL’s suck. They say that if you want to have both protection and investment, then you ought to just buy term insurance then invest the rest of your money on mutual funds. This makes a lot of sense to me. 

If you do it this way, you’d have protection which is very cheap (as cheap as what they have in VUL’s) and you’d have investments without monstrous premium charges. I don’t see why you’d want to pay premium charges for investment funds that are no better than mutual funds offered by other financial companies.

Full Disclosure: I have a regular-pay VUL insurance policy on its fourth year now. I had it when I didn’t know all these stuff yet. 

I wouldn’t recommend VUL’s to my worst enemy.