Variable Universal Life Insurance (VUL)

Variable Universal Life Insurance (VUL) is a type of permanent life insurance that mixes a tax-free death benefit with a savings account that you, the policyholder, get to invest. Think of it as a life insurance policy with a built-in brokerage account. After you pay your premium, the insurance company deducts its fees and the cost of the insurance itself. The rest of your money goes into the policy's cash value, which you can then allocate among various investment options, known as sub-accounts. These sub-accounts are essentially mutual funds that invest in stocks, bonds, and other securities. The “universal” part refers to the flexibility you have in paying your premiums, a feature inherited from universal life insurance, while the “variable” part means the value of your savings component will fluctuate—or vary—with the performance of your chosen investments. You are in the driver's seat, for better or for worse.

The core appeal of a VUL policy is its dual nature. It's pitched as a solution for both your insurance needs and your investment goals. Here's the basic flow:

1. You Pay a Premium: You make payments to the insurance company. Unlike whole life insurance, VUL policies offer flexibility. You can often adjust the amount and frequency of your premium payments, within certain limits.
2. Costs are Deducted: Before your money gets to work, the insurer takes its cut. This includes the cost of insurance (the “mortality charge” that covers the death benefit), administrative fees, and other charges. These fees are a critical, and often hefty, part of the policy.
3. Money Goes to Sub-Accounts: The remaining cash is deposited into your chosen sub-accounts. You typically get a menu of options, similar to a 401(k), allowing you to create your own asset allocation mix.
4. The Cash Value Grows (or Shrinks): The value of your policy's cash account is directly tied to the performance of these sub-accounts. If your investments do well, your cash value grows, and this growth is tax-deferred. If they perform poorly, your cash value shrinks. If it falls too low, it may not be enough to cover the ongoing insurance costs, and you may have to pay more premium out-of-pocket to prevent your policy from lapsing.

For a value investor, complexity and high fees are red flags, and VUL policies raise both. The great Warren Buffett has famously advised most people to “buy term life insurance and invest the difference.” This simple strategy separates the pure, low-cost protection of insurance from the act of investing, and it's a useful lens through which to critique VUL.

• Exorbitant Fees: VUL is one of the most expensive ways to invest. The layers of fees—including sales commissions, administrative fees, mortality and expense risk charges, fund management fees within the sub-accounts, and potential surrender charges if you cancel early—create a massive drag on performance. A value investor seeks to minimize costs to maximize long-term returns, and VUL's fee structure is a major headwind.
• Unnecessary Complexity: Value investing follows the principle of investing only in what you understand. VUL policies are notoriously complex, with lengthy prospectuses and opaque fee structures. It’s difficult to determine how much of your premium is actually being invested versus being consumed by costs. This complexity often serves the seller more than the buyer.
• Better Alternatives for Investing: The main selling point of VUL—tax-deferred investment growth—is not unique. Investors can achieve the same tax benefit, usually with far lower costs and greater simplicity, through dedicated retirement accounts like an IRA (Individual Retirement Account) or a 401(k). These vehicles don't bundle in expensive insurance costs, allowing your investment dollars to work more efficiently.

In short, while VUL offers the potential for market-beating returns inside an insurance wrapper, the high costs and complexity mean you are starting the investment race with lead weights on your ankles.

So, should you consider a VUL? It's generally not recommended for most people, but here's a balanced summary to help you decide.

• Flexibility: You can adjust your premium payments and death benefit as your needs change.
• Higher Return Potential: Unlike other cash value policies with fixed interest rates, you have the potential for higher, market-based returns.
• Tax-Deferred Growth: Your cash value grows without being taxed annually.

• Investment Risk: You bear all the investment risk. Poor market performance can wipe out your cash value and even cause your policy to lapse.
• High Costs: Layers of fees can severely erode your investment returns over time.
• Complexity: These are complicated products that are difficult to fully understand and compare.
• Less Protection, More Risk: The primary purpose of life insurance is to provide a guaranteed safety net. By tying that safety net to volatile market performance, VUL fundamentally weakens its core insurance function.

For the vast majority of investors, keeping insurance and investments separate is simpler, cheaper, and ultimately more effective.