The main advantage to purchasing a variable universal life insurance policy is the flexibility of premium payments to maintain the policy and the tax deferred growth in the separate, cash value account.

There are two main features to a variable life insurance contract. The Cost of Insurance Element, and also the savings component, or “cash value.”

The cost of insurance covers mortality, plan administration fees, and other direct expenses associated with keeping the policy in check. The cost of insurance will depend on a few factors; but mainly the person’s age, insurability, and risk amount.

Any premiums paid in excess of the cost of insurance are able to accumulate cash value in an account that can be invested in stocks, bonds, equity funds, money market funds, bond funds, and more. The advantage to the cash value account is the excess premium accumulates interest, in addition to covering the cost of insurance. Performance of the savings account will depend on the current market, interest rate environment, and economic factors that affect variability in an insurance contract. Policyholders are due taxes on the direct withdrawals they make in excess of the cash value of the universal life insurance plan. Earnings can be deducted with a LIFO (Last-In-First-Out), or, FIFO (First-In-Last-Out) accounting method. However, loans against the policy are able to be withdrawn tax-free. Loan interest, principal and unpaid loan amount may become due upon the surrender or termination of the life insurance policy. Although, the death benefit amount usually covers these expenses.

An important feature to a variable, or any universal life insurance policy are the riders attached with it. The accelerated benefit rider will cover critical and terminal illnesses. It may also, sometimes, protect against chronic illness too, will allow the policy holder to take a portion of the death benefit, tax free, to cover expenses of living with the need for critical care in a nursing home, or home health care setting. The waiver of premium rider will also cover the cost of maintaining the policy in the event the policyholder becomes disabled. Policy owners must be attentive to the minimum premium amount which keeps the life insurance policy in force. One strategy policy owners may employ is the use of funding a large excess cash value in lump sums, or over-funding through a period of time, to ensure the policy’s force, for longer. That is where the universal life insurance policy derives its name from. The premium is flexible, as well as the death benefit. Keep in mind though, that premium expectations will rise as the policy owner grows older, and the insurability risk factors change. Full medical underwriting is required to obtain a variable life insurance policy.