Variable universal life insurance is a complex, permanent life insurance policy where the policy owner takes all of the inherent risk.
Unlike whole life insurance, there are no guarantees beyond year one – no premium, death benefit or cash value guarantees. Like whole life insurance, there is a cash account, however, the cash values are driven by many factors – the most significant being the performance of the funds w/i the separate account that are selected by the owner.
Premiums go into cash accounts and the cash increases by underlying fund performance. Administrative and mortality costs increase annually and are deducted from the cash account to keep the death benefit in force. If the premium and fund performance is not sufficient to cover the administrative costs, usually when we are older, the cash values begin to decrease. If things don’t change, the cash value depletes unless you increase your premium. Eventually, the cash runs dry and the policy lapses. Although we see the annual statements, most people rarely look closely as this process unfolds.
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The variable part
The owner determines what funds they wish to invest in. These vary by carrier and most carriers have limited investment fund choices available with a variety of risk tolerances.
Policy expenses are deducted from the separate investment account on a regular basis (usually monthly). There are many expenses: agent commissions, mortality costs, administrative costs and 12b-1 fees.
Additionally, there are usually fund acquisition costs as well. The owner assumes the risk for the cash account.
The Universal Part
The premiums and death benefits are both flexible and adjustable.
If interest rate performance is poor, premiums should be adjusted up to offset the lowered, anticipated cash values. If interest rates are good, premiums may be reduced. It is important to review these plans often to be sure they are properly funded.
The best way to do this review is with a competent, experienced life insurance agent who will run an in – force illustration for you. (Sadly, this exercise is rarely completed and this ignorance can create serious effects as we age.)
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