Simplifying Life Insurance in India
Difference Between Variable Universal and Variable Life Insurance
Life insurance choices can directly affect your family's financial planning and future. Variable life insurance (VL) and variable universal life insurance (VUL) are permanent life insurance products offering lifelong coverage and a cash value component.
The main difference between these policies is their structure and flexibility. Variable life insurance has fixed premiums and allows investment in sub-accounts. In contrast, variable universal life insurance offers the same investment options but with more flexibility in premium payments and death benefits.
Continue reading as we explore these common insurance choices to assist you in making the right decision.
Table of Contents
What is Variable Life Insurance?
Variable life insurance is a complex type of permanent life insurance product that offers investment elements in addition to providing death benefits. While other policies provide certain and standard rates of returns, this one allows policyholders to put their premium’s cash value in various investment products, such as stocks, bonds, mutual funds, money market accounts, and more.
The policy's value depends on the realisation of such underlying investments, which means the policy can yield better returns but comes with normal market risks. Every policy is administered by professional investment managers responsible for investment accounts; however, this service incurs management charges.
The distinguishing feature of variable life insurance is flexibility regarding risk tolerance and choice of investments from stocks that promise fast yield to bonds with steady, gradual profits.
What is Variable Universal Life Insurance?
Variable universal life insurance combines life coverage with investment opportunities. This policy offers dual benefits: a death benefit for beneficiaries and the potential for cash value accumulation based on the performance of various investment options (stocks, bonds, etc.).
The cash value in a VUL policy can grow through investments. Unlike universal life insurance, the policyholder can choose how the cash value is allocated across different sub-accounts, making it subject to market conditions.
The key advantages of variable universal life insurance are its flexibility and investment potential. Policyholders can adjust their premiums, death benefits, and investment choices to suit changing needs.
Difference Between Variable Life and Variable Universal Life Insurance
The major difference between variable and variable universal life insurance is based on the type of investment strategy and risk profile. Both provide lifetime insurance protection with adjustable premiums plus cash value build-up, but they vary widely regarding investment and return.
The table below has a comparison of both the policies based on multiple aspects:
What are the Advantages of Variable Life Insurance?
The benefits of variable life insurance are numerous in the current marketplace due to its flexibility and income-growth opportunities for policyholders. Here are some of them:
Investment Versatility
Several investments offer the opportunity to generate more cash for a policy than ordinary insurance policies, with the option of choosing the degree of risk involved.
Flexible Death Benefits
The plan offers flexible death benefits, providing either a fixed or a combination of the coverage amount and accumulated cash value.
Tax Advantages
The money increases on a tax-advantaged basis, while the premiums are paid with the policy's cash value, which minimises the added costs.
Adjustable Coverage
Enhancements include the cost of higher premiums whereby the death benefit increases usually by a 4% interest rate.
Regulatory Protection
Government oversight enhances safety by ensuring that policy funds are invested in reliable, government-regulated securities.
What are the Disadvantages of Variable Life Insurance?
Variable life insurance has substantial advantages due to the flexibility of the policy and investment plan options. Still, there are also significant disadvantages that must be considered before entering into the contract. These are:
Cost Factor
Due to administration fees and investment management costs, this policy is more expensive than a standard life insurance policy.
Market Risk
The policy's value depends on investment returns, which may decrease during unfavourable market conditions.
Surrender Penalties
Penalty fees apply for premature surrender or policy cancellation within the first 10 to 15 years.
Variable Death Benefit
The benefit amount varies with market conditions and may even reduce while the premium increases.
Investment Complexity
Variable life insurance demands a higher management and investment knowledge level than most standard policies.
What are the Advantages of Variable Universal Life Insurance?
The benefits of variable universal life insurance are significant in today’s market, offering flexibility in premiums and coverage and potential cash value accumulation. Here are some of its key advantages:
Financial Flexibility
The best thing about the policy is the flexibility of the premium, which you can revise depending on your financial capacity. You can pay more or less or suspend contributions when your cash value is adequate to meet expenses. The cash value accumulates as a reserve and can be borrowed or withdrawn for different purposes, such as further education or an unexpected crisis.
Coverage and Growth Benefits
Lifelong coverage is attached to tax-advantaged growth potential in this policy. It can earn credited interest on your cash value on a tax-deferred basis and has a minimum guaranteed interest rate that ensures security.
Estate Planning
As an estate planning technique, variable universal life insurance is adequate for transferring wealth. The policy's inbuilt savings feature and the ability to borrow from it at any time makes it an effective tool for medium and long-term planning.
What are the Disadvantages of Variable Universal Life Insurance?
Variable universal life insurance has a few drawbacks that should be carefully considered before committing. These include:
Risk and Stability Concerns
Policy flexibility comes with risks, including potential lapses if cash values drop to zero, non-guaranteed returns, and cash value fluctuations tied to interest rates.
Financial Limitations
While the policy offers tax benefits, the cash value isn’t paid to beneficiaries unless riders or increased death benefits are added.
Some Withdrawals are Taxable
Withdrawals from a VUL policy may be taxed if they exceed the amount invested. Life insurance taxes are based on a first-in-first-out rule, meaning contributions are withdrawn tax-free before any taxable gains.
Variable Life or Variable Universal Life Insurance - Which is Better for You?
The decision to purchase variable life (VL) or variable universal life (VUL) insurance mainly depends on the policyholder’s financial objectives, attitude toward risk, and investment choices.
Variable life insurance (VL) is ideal for conservative individuals who prefer professional management and are comfortable with limited flexibility. While it allows cash value accumulation through investments, premiums are fixed, and the policy does not offer the same level of adaptability in adjusting premiums or death benefits as its universal counterpart.
Variable universal life insurance (VUL) appeals to financially informed clients seeking greater growth potential through investment subaccounts. It offers the ability to adjust premiums and death benefits, along with the chance to achieve higher returns tied to market performance. However, it involves active management, a higher risk tolerance, and market fluctuations.
Alternative Options for Variable and Variable Universal Life Insurance
1. Whole Life Insurance
Whole Life Insurance policies are suited for people who prefer regular and predetermined increases in premiums and options for dividends.2. Term Life Insurance
Term Life Insurance policies are best suitable for those who want to sell only death benefits, no cash values included.3. Universal Life Insurance
Universal Life Insurance is ideal for those seeking flexible premiums and death benefits, with cash value growth based on a fixed interest rate.4. Indexed Universal Life Insurance
Indexed Universal Life Insurance are best for those who want flexible premiums and death benefits, with cash value growth linked to a market index for potentially higher returns.FAQs about Variable Universal Vs Variable Life Insurance
What is the main difference between variable and variable universal life insurance?
What is the difference between variable universal life and term life insurance?
Can I withdraw money from my variable life insurance policy?
Which is best in life insurance: variable or variable universal life insurance?
What are the benefits of variable life insurance?
Can I change the investment options in my variable universal life insurance policy?
What happens if I stop paying premiums on my variable life insurance policy?
Are there any tax implications when withdrawing from a variable universal life insurance policy?
How do death benefits work in variable universal life insurance?
What are the fees associated with variable universal life insurance?
Which factors should be considered when choosing between variable life and variable universal life insurance?
Can I take loans against my variable life insurance policy?
How does the cash value grow in a variable universal life insurance policy?
What happens if my investments perform poorly in a variable universal life insurance policy?
Can I customise my variable universal life insurance policy?
Important Guides related to Life Insurance
Disclaimer
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.
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