Variable universal life (VUL) insurance

Variable universal life (VUL) is universal life insurance in which you choose how the policy's cash value is invested, usually among stock, bond and money market funds called subaccounts. The death benefit and cash value can rise or fall with those investments, there is no guaranteed interest rate on the invested portion, and you carry the market risk. It is a life insurance policy and a registered security at the same time.

How a VUL policy works

You pay premiums, flexibly within limits, as with any universal life policy. The insurer deducts charges and puts the remainder into the policy's account. Instead of crediting an interest rate set by the company, the account is allocated across subaccounts that hold shares of mutual-fund-like portfolios. The value goes up and down with those funds.

Every month the insurer deducts the cost of insurance charge (the price of the insurance protection), administrative fees and any rider charges from the account. If investment returns are strong, the account can grow well beyond what is needed to pay those charges. If returns are weak, the charges still come out, and the account can shrink.

The death benefit follows the chosen option. Under a level benefit (option A) the insurer pays the face amount; under an increasing benefit (option B) it pays face amount plus account value. See Universal life death benefit options A and B. Some policies add a guarantee that the death benefit will not fall below a stated minimum if you pay a stated premium. Read the specific terms, since such a feature is a secondary guarantee with conditions.

What it costs

VUL has more layers of charges than most life insurance. A prospectus typically lists:

The exact amounts are in the prospectus and vary widely by company and product. fees and charges inside permanent life insurance covers how these layers compound over time. Because charges depend on your age and the cost of insurance rises each year, the share of the account consumed by insurance cost grows in later decades.

The main risk: a policy that runs out

The premium is not fixed. A VUL buyer who pays a modest planned premium on the assumption of strong returns may find that, when returns are poor, the account does not cover the monthly deductions. The insurer will usually require extra premium. If you cannot or do not pay, the policy lapses, and a lapse after years of premiums leaves nothing for your beneficiaries. Policy loans and withdrawals make this worse. When a policy with loans lapses, the loan balance can produce taxable income even though you receive no money. Details are in why universal life policies lapse, and how to prevent it.

The sales illustration usually assumes a steady annual return. Real returns are uneven, and the order of good and bad years matters because charges are paid from the account in every year. Ask for an illustration at a low or zero return, which shows the premium needed in a bad market. See how to read a life insurance illustration.

A hypothetical example

Say a 40-year-old pays $500 a month into a VUL policy, with an illustration assuming 7% a year. The illustration shows the cash value reaching a large figure by 65 and the policy staying in force to 100. Now say that the same 40-year-old's investments return 3% a year on average. The illustration at 3% shows the account running out in the early 80s unless premiums rise. The dollar amounts here are invented to show the structure, not a quote.

Taxes

Like other permanent life policies, VUL gets tax-deferred growth, and the death benefit is generally income-tax-free to beneficiaries (see is life insurance taxable?). To keep that treatment the policy must meet the section 7702 tests, and overfunding it can turn it into a modified endowment contracts and the 7-pay test, which changes how loans and withdrawals are taxed. See how cash value is taxed: withdrawals, loans and surrenders. Investment gains inside the policy are not taxed each year, but you also cannot deduct losses.

VUL compared with other choices

• Versus term plus investing separately: the buy term and invest the difference: does it hold up approach avoids VUL's layered charges and keeps the investments in accounts with their own tax rules, but it gives up the policy's tax-deferral and any permanent death benefit.
• Versus Indexed universal life (IUL) explained: an IUL protects against index losses with a floor but caps gains; a VUL has no floor and no cap. VUL carries more market risk and, potentially, more upside.
• Versus whole life: whole life offers a guaranteed premium, benefit and cash value schedule. See whole life vs universal life.

LIMRA reported that variable universal life accounted for about 15% of U.S. individual life new annualized premium in 2025, roughly $2.6 billion, in its 2025 sales release.

Who VUL suits, and who it does not

VUL tends to suit people who already maximize tax-advantaged accounts such as a 401(k) and IRA, have a lasting insurance need (for example estate liquidity), are comfortable with market risk, and can fund the policy well above the minimum. It tends to fit poorly for a family with a limited budget that needs a death benefit that will certainly be there, for anyone who may need to stop paying, and for buyers who want a guarantee. The sale must come from someone licensed for both insurance and securities; see variable life insurance and the securities rules that govern it.

Key takeaways

• VUL combines flexible universal life with investment subaccounts; you bear the market risk and there is no guaranteed interest on the invested value.
• Charges come in layers (insurance cost, administrative, mortality and expense, fund fees, surrender charges), and the cost of insurance rises with age.
• A weak market can force higher premiums or cause a lapse, so test illustrations at low returns.
• It is a security as well as insurance, so read the prospectus before you buy.