Variable Universal Life Insurance (often shortened to VUL) is a type of life insurance that builds a cash value. In a VUL, the cash value can be invested in a wide variety of separate accounts, similar to mutual funds, and the choice of which of the available separate accounts to use is entirely up to the contract owner. The 'variable' component in the name refers to this ability to invest in separate accounts whose values vary--they vary because they are invested in stock and/or bond markets. The 'universal' component in the name refers to the flexibility the owner has in making premium payments. The premiums can vary from nothing in a given month up to maximums defined by the Internal Revenue Code for life insurance. This flexibility is in contrast to whole life insurance that has fixed premium payments that typically cannot be missed without lapsing the policy.
Variable universal life is a type of permanent life insurance, because the death benefit will be paid if the insured dies any time as long as there is sufficient cash value to pay the costs of insurance in the policy. With most if not all VUL's, unlike whole life, there is no endowment age (which for whole life is typically 100). This is yet another key advantage of VUL over Whole Life. With a typical whole life policy, the death benefit is limited to the face amount specified in the policy, and at endowment age, the face amount is all that is paid out. Thus with either death or endowment, the insurance company keeps any cash value built up over the years. With a VUL policy, the death benefit is the face amount plus the build up of any cash value that occurs (beyond any amount being used to fund the current cost of insurance.)
If good choices for investments are made in the separate accounts, a much higher rate-of-return can occur than the low fixed rates-of-return typical for whole life. The combination over the years of no endowment age, continually increasing death benefit and high rate-of-return in the separate accounts of a VUL policy could typically result in value to the owner or beneficiary which can be many times that of a whole life policy with the same amounts of money paid in as premiums.
Regulation of VUL Providers
Because the separate accounts are securities, the representative providing a VUL must be working in accordance with the securities regulations of the country or province in which he operates. And because they are life insurance policies, VULs may only be sold by representatives who are properly licensed to sell life insurance in the areas in which they operate. The insurance company providing the policy must also be licensed as an "insurer."
This dual regulation helps protect consumers, who can look up the track record of offenses of any provider listed by the regulating SRO (Self Regulatory Organization) or provincial securities commission.
- United States. VULs may only be sold in the United States by representatives who have a "producers" life insurance license in the state(s) in which he operates. The insurance company providing the policy must also be licensed in the state(s) as an "insurer." Because the separate accounts are securities, the representative must be working through a broker/dealer registered with the United States' SRO, the Financial Industry Regulatory Authority (FINRA) and himself be registered with FINRA. (FINRA has an online database an investor can use to look up offenses and regulatory actions of any broker or broker/dealer.) The fact of a representative's securities registration will show on his state insurance license as "Variable" as in "qualified for Life and Variable Products." (The exact wording could vary from state to state.)
- Canada. VUL's, as securities, may only be sold in Canada by representatives duly registered with their provincial securities commission to sell mutual funds. And as VUL's are life insurance policies, providers must comply with the regulations of the Canadian Life and Health Insurance Association (CLHIA). In Canada, there is no real differentiation between universal life and variable universal life. The Canadian Securities Industry is also regulated by 2 self-regulatory organizations: the IIROC {Investment Industry Regulatory Organization of Canada} and the MFDA (Mutual Fund Dealers Association). The Canadian Securities Administrators oversee these self-regulatory organizations and rely on them as front-line regulators of securities dealers and their representatives.
