Variable Life Insurance vs. Variable Universal Life Insurance: What’s the Difference & Which One Should You Get?

Updated: October 18, 2024

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Variable life insurance (VLI) is a type of permanent life insurance that offers a fixed death benefit — the sum paid upon your death. Variable universal life insurance, commonly known as VUL, provides adjustable premium payments and a flexible death benefit. Both insurance options feature subaccounts similar to mutual funds, which you can select based on your preferences. The primary difference lies in their flexibility and control.

VLI plans are ideal for those seeking stability and predictability in their insurance coverage. VUL policies, on the other hand, cater to individuals who want more control over their insurance and investment options. Each type is best suited for investment-savvy, high-income earners comfortable with a certain level of risk in their insurance plans.

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Key Takeaways

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Variable life insurance offers consistent premiums and a secure death benefit, making it a solid choice for customers who value financial predictability and security.

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Variable universal life insurance is characterized by its adjustable premiums and adaptable death benefits, catering to those who prefer investment flexibility and personalization in their policy.

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Both types of life insurance are suitable for high-income, market-savvy individuals or those with an advisor. For most, term life insurance is recommended for its cost-effectiveness, with a separate investment of savings.

Difference Between Variable & Variable Universal Life Insurance

The primary distinction between variable life insurance (VLI) and variable universal life (VUL) insurance lies in their flexibility and growth potential.

A VL policy offers a more stable approach. It allows the policyholder to increase the cash value of the death benefit while maintaining the same premiums, providing a measure of predictability.

On the other hand, VUL insurance allows for more dynamic management, with adjustable premiums and death benefits. The cash value in a VUL policy can vary based on market conditions, which affects the death benefit.

Variable vs. Variable Universal Life Insurance

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Variable Life Insurance
  • Has a guaranteed minimum death benefit
  • Can add cash value or premiums paid to increase the death benefit
  • Market losses can lower the death benefit
  • Investments can accelerate cash value growth
  • Can have higher management fees
  • Has fixed premium payments
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Variable Universal Life Insurance
  • No guaranteed death benefit
  • Can lower or raise death benefit as life needs change
  • Cash value growth is slower and not guaranteed
  • May have more manageable fees
  • Has adjustable premium payments

While both variable life insurance and variable universal life insurance are forms of permanent life insurance, they offer distinct approaches to policy management. VLI provides a stable death benefit with investment-driven cash value potential, whereas VUL insurance emphasizes flexibility in premiums and death benefits, adapting to changing life circumstances. Despite offering higher cash value accumulation potential, VUL policies may experience cash value losses, reducing the death benefit.

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MONEYGEEK DICTIONARY

In life insurance, cash value refers to a savings component included in certain permanent life insurance policies, such as variable life insurance and variable universal life insurance. This value accumulates over the life of the policy and can be used in various ways by the policyholder. The cash value grows tax-deferred and can be borrowed against or used to pay premiums.

Features of Variable Life Insurance vs. Variable Universal Life Insurance

Variable Life Insurance

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    Length of Coverage

    As a permanent life insurance policy, a variable life insurance policy is designed to last your lifetime as long as premiums are paid.

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    Cash Value

    This policy has high earning potential but can also lose cash value depending on market fluctuations in the sub-accounts. Variable life insurance's cash value grows tax-deferred, but removing cash can trigger a taxable event.

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    Death Benefit

    The death benefit has a guaranteed minimum amount determined at the start of the policy, which is safe from market fluctuations. You can also choose a face-value death benefit option, which is the face value amount plus cash value or face value amount plus premiums paid. Choosing the latter two may result in a higher premium for the life of the policy.

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    Premium Payments

    Premium payments are fixed from the start of the policy. Failing to make the agreed-upon premium payments could cause the policy to lapse.

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    Dividend Eligibility

    Although this is a permanent policy, it is not eligible for dividends, even when placed with a mutual insurance company that participates in dividend disbursement.

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    Rider Eligibility

    This policy is eligible for riders such as the accelerated death benefit rider. However, rider availability can vary by carrier and policy plan details. Adding riders will likely increase the premium amount.

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    Use for Estate Planning

    A variable life insurance policy is better for estate planning, as it has a guaranteed minimum death benefit your beneficiary can depend on.

Variable Universal Life Insurance

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    Length of Coverage

    VUL is a permanent life insurance policy with continuous premium payments required to maintain the death benefit. Changes to the death benefit can affect premiums owed.

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    Cash Value

    VUL policy allows you to choose your investments, which will affect how fast your cash value grows. The cash value growth is tax-deferred until removed, which could trigger a taxable event.

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    Death Benefit

    The death benefit in a variable universal life policy usually does not have a guaranteed minimum; it is flexible throughout the policy's life. As life situations change insurance coverage needs, you can increase or decrease the death benefit, which will likely affect the premium amount owed. There is no option to include the cash value or paid premiums in variable universal life insurance death benefits.

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    Premium Payments

    Premium payments are flexible and can be adjusted, even when the death benefit is not. A VUL plan has a high chance of lapsing when lowering the premium payments unless the cash account has enough value to offset the lower premium.

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    Dividend Eligibility

    This policy is not eligible for dividends, even when issued by a participating mutual insurance company.

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    Rider Eligibility

    This policy is eligible for life insurance riders, which can vary by carrier and plan. For example, you may want a rider to cover disability, which requires finding a company that offers it with VUL. You should expect to pay more when adding a rider.

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    Use for Estate Planning

    This policy is not ideal for estate planning as it does not have a guaranteed death benefit. Any death benefit or premium changes could cause the policy to lapse.

Tax Implications: Variable Life Insurance vs. Variable Universal Life Insurance

Both variable life insurance and variable universal life insurance offer tax-deferred growth on the cash value component, meaning you won't pay taxes on any earnings as long as they remain within the policy. Withdrawals or loans taken from the cash value are tax-free up to the amount of premiums paid. However, any gains withdrawn may be taxable. Notably, the death benefit in both policies is typically tax-free to beneficiaries, providing a significant advantage.

Understanding variable life and variable universal life insurance tax benefits and implications can greatly influence financial planning and the choice between these two types of policies.

Variable vs. Variable Universal Life Insurance: Pros & Cons

Understanding the pros and cons of variable life insurance and variable universal life insurance is essential for making an informed decision.

Each type offers unique benefits and drawbacks, impacting your financial planning and insurance coverage. Explore these to help you assess which policy aligns with your needs and financial goals.

Pros and Cons of Variable Life Insurance

Exploring variable life insurance pros and cons is important for those interested in a policy that offers both a secure financial future and the potential for investment growth. This type of insurance provides opportunities and challenges tailored to individual risk tolerance and financial goals.

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Pros
  • Guaranteed Death Benefit: Provides a minimum payout upon death, ensuring financial security
  • Fixed Premiums: Offers predictability in budget planning
  • Potential for High Cash Value Growth: Linked to market performance, offering higher growth prospects
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Cons
  • Market Risk Exposure: Cash value can fluctuate with market changes
  • Higher Management Fees: Typically comes with additional costs for managing investments
  • Limited Flexibility: Does not allow for adjusting premiums

Pros and Cons of Variable Universal Life Insurance

Understanding variable universal life insurance pros and cons helps in assessing a policy that offers remarkable flexibility and investment control. Ideal for those seeking to tailor their life insurance to dynamic financial conditions, this option requires careful consideration of its management demands.

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Pros
  • Flexible Premiums: Allows adjustment of payments based on financial situation
  • Adjustable Death Benefit: Can modify coverage as personal circumstances change
  • Investment Control: Offers a range of investment options for cash value
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Cons
  • No Guaranteed Death Benefit: Death payout can vary based on cash value and market conditions
  • Potential for Loss: Market downturns can reduce cash value and death benefit
  • Management: Requires active management and understanding of investment options
MONEYGEEK DICTIONARY

Variable whole life insurance is a type of permanent life insurance that combines the guaranteed protection of whole life insurance with the investment flexibility found in variable life policies. Policyholders can invest the policy's cash value in various accounts, potentially increasing the value based on market performance. This policy offers both a fixed premium and a guaranteed death benefit, with the added potential for cash value growth through investments.

Variable Whole Life vs. Variable Life Insurance The main difference between variable whole life insurance and variable life insurance lies in the premium structure and the level of guarantees. A variable whole life policy provides fixed premiums and a guaranteed death benefit, offering more predictability and stability. In contrast, variable life insurance may offer more investment options but with less guarantee on the death benefit, depending on the policy's terms.

Variable Whole Life vs. Variable Universal Life Insurance The primary difference between variable whole life and variable universal life insurance revolves around premium and benefit flexibility. Variable whole life insurance maintains fixed premiums and a guaranteed death benefit, making it more stable but less flexible. VUL insurance, however, allows policyholders to adjust premiums and the death benefit, offering more adaptability but with increased risk due to potential market fluctuations affecting the cash value.

Should You Get Variable or Variable Universal Life Insurance?

Choosing between variable life and variable universal life insurance hinges on your financial profile and preferences. Both are suited for those who are investment-savvy and have a higher income, combined with a readiness for risk.

Variable life is an excellent choice if you want a guaranteed minimum death benefit and predictable premium rates. Variable universal life is ideal for those who want more investment control and the ability to change the premium or death benefit.

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    Variable life insurance is best for:

    • High-income earners with maximized savings options
    • People who want death benefit options
    • Someone wanting greater cash value growth potential
    • People who are okay with market fluctuations that can negatively affect death benefits and cash value
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    Variable universal life insurance is best for:

    • High-income earners who have already maxed out other savings options
    • People who want to choose and closely monitor market conditions
    • Someone who wants a flexible premium and death benefit
    • People who understand how death benefits and premium changes can cause the policy to lapse
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MONEYGEEK EXPERT TIP

Both variable life insurance and variable universal life are best for high-income earners with a deep knowledge of the market and its volatility or an advisor who can manage the account for them.

For most insurance shoppers, we recommend term life insurance because it's the cheapest option, and then investing the premium savings separately. Consider these term life insurance companies when researching your coverage options.

If you still believe permanent life insurance is your best option, you should look at our rankings of the top companies for whole life insurance and universal life insurance to help you make your decision.

How to Find the Right Life Insurance Policy

Finding the right life insurance policy is a vital step in securing your financial future. It involves assessing your specific needs and understanding the various options available.

  1. 1
    Assess Your Financial Needs

    Begin by thoroughly evaluating your financial circumstances. This includes analyzing debts, ongoing expenses, income stability and the financial needs of dependents. It's essential to consider both current obligations and future goals.

    This initial assessment lays the groundwork for understanding the level of coverage required to provide adequate financial security.

  2. 2
    Understand Different Types of Policies

    Doing your research is critical to understanding life insurance. Familiarize yourself with various policy types like term, whole life, variable life and variable universal life. Each has unique features and benefits that cater to different needs.

    For example, term life offers temporary coverage, while whole life provides lifelong coverage and cash value accumulation. Understanding these nuances will help you find a policy that aligns with your personal circumstances.

  3. 3
    Consider Your Age and Health

    Your age and health status can help determine the type of policy you should choose and the cost of premiums. Generally, younger and healthier individuals qualify for lower premium rates.

    It's also important to consider how your current health status might affect your insurance options and costs.

  4. 4
    Evaluate Your Investment Goals

    For those interested in a combination of investment and insurance, policies like variable life or variable universal life are worth considering.

    These policies provide death benefits and include investment components that can grow cash value. Align these features with your long-term investment goals and risk tolerance.

  5. 5
    Compare Quotes and Policies

    Shop around and compare different life insurance quotes and policies.

    Look beyond just the premium rates; consider the benefits, policy exclusions, available riders and the insurance company's financial strength. This will ensure you get comprehensive coverage at a competitive price.

  6. 6
    Seek Professional Advice

    Although it's optional, consulting a financial advisor or insurance agent can help you navigate your options and provide clarity about each type of policy. They can offer personalized advice, helping you choose a policy that matches your unique financial situation and future goals.

  7. 7
    Review and Update Regularly

    As your life circumstances evolve — like changes in income, marital status or family size — your insurance needs may also change.

    Regularly reviewing and updating your policy ensures it remains aligned with your current financial situation and future objectives.

Frequently Asked Questions About Variable vs. Variable Universal Life Insurance

Determining which is the better option between variable life and variable universal life insurance depends on your personal needs and circumstances. MoneyGeek addressed some of the most common questions about variable life insurance and variable universal life insurance to help you make an informed decision.

What is variable life insurance?
How does variable life insurance work?
What is variable universal life insurance?
How does variable universal life insurance work?
What is the difference between variable and variable universal life insurance?
Should I get variable or variable universal life insurance?
Can I lose money with these policies due to market downturns?
How do I manage the investment component of these policies?
Are these policies suitable for short-term coverage needs?
Is variable life insurance a good investment?
Is VUL a good investment?
How do premiums in variable universal life policies vary from those in variable whole life policies?
What is group variable universal life insurance?

About Mandy Sleight

Mandy Sleight headshot

Mandy Sleight is a licensed property, casualty, life and health insurance agent with 20 years of experience in the industry. She has worked for major insurance companies like State Farm and Nationwide, and most recently as the Operations Coordinator for a startup employee benefits company.

Sleight holds a business administration and management degree from the University of Baltimore and a master's in business administration from Southern New Hampshire University. She uses her vast knowledge of insurance and personal finance to create easy-to-understand and engaging content to help readers make smarter choices with their budgets and finances.

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