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Universal or Variable Life Insurance; Should I Buy?

By in Guest Post, Insurance, Investing | 12 comments

Do You Need Whole, Universal of Variable Life Insurance?

Ben Luthi of The Wealth Gospel asks,

Q: In what situations is it better to have universal life, variable life, or other investment-based insurances?

Guest Contributor, Ben Luthi of The Wealth Gospel

Life Insurance Reverse Pitch

Have you heard of the “reverse pitch”? That’s when someone asks you for something and you reverse and ask them for something back.

Since Ben was a former insurance agent and did a great job comparing term and whole life insurance, I reverse pitched and asked him to research and write the response to his own question. He did a great job, probably a better than I would have done.

If you’ve ever been approached to buy Universal or Variable Life Insurance, you must read this article.

Should I Buy Universal or Variable Life Insurance?

In a previous post, I compared term life insurance and whole life insurance. I did so because, believe it or not, one isn’t inherently better than the other. Just like many other financial tools, it depends on your goals and financial situation, despite what personal finance “gurus” might say. Today, we’re going to go one step further and discuss other forms of permanent life insurance that are sometimes mistaken for or lumped together with whole life.

The point of all permanent insurance policies is that the excess of premium payments above the cost of the insurance itself is credited to a cash value portion of the policy.

But there are definitely differences in how all that happens and what happens to your cash value.

Universal Life

With whole life insurance, the premium stays the same for the life of the policy, as does the cost of the insurance.

However, with universal life, the cost of insurance is based on an annually renewable term life table, meaning that over time, more and more of your premium is going to pay the cost of the insurance (because as you age, the insurance part gets more costly because your chance of dying increases) and less and less is going to the cash value. That sounds pretty shady right off the bat, doesn’t it?

Universal life was created with the idea that the “investment portion” of the policy would increase due to rising interest rates and stock prices. Thus the increased profit on investments would cover the growing premium cost.

This little trick was shifting a greater portion of the insurance cost to the policy holder.

Universal or Variable Life Insurance?

Universal or Variable Life Insurance?

Unlike the guaranteed death benefit you receive with whole life as long as you pay all your premiums, there is no “guaranteed death benefit” on universal life insurance.

If the expected increase in value (from growing the investment portion of the policy) doesn’t materialize, the cost of the policy can actually decrease the death benefit.

The advantage of a universal life policy is that the policyholder has more flexibility with the premium and death benefits.

For example, the policyholder can decrease her premiums for a time (down to a minimum) if she’s unable to make the regular premium payment, and then move it right back up. The death benefit can also be increased (subject to insurability) and decreased at the policyholder’s request.

So are there situations where this might be a good alternative to whole life or term?

Yes, but not necessarily on an individual level. Universal life seems to be more suited for businesses where a buy/sell arrangement is made, key person coverage is needed, or as an added benefit for executives. Unfortunately, I’ve seen many young couples get suckered into a UL policy by an agent (usually an auto insurance agent who has no idea what he’s selling), so it’s important to understand that there aren’t many situations where an individual needs it.

Variable Life

In a variable life policy, the insurance costs are similar to a whole life policy but they do not increase over time. The bulk of your premium, therefore, is invested in the insurance company’s separate accounts rather than its general account. Unlike the general account, the separate account is similar to a mutual fund and offers more risk as well as return for the policyholder, with the policyholder choosing which investments for the separate account.

The policyholder takes on much of the risk, because the cash value and the death benefit can fluctuate with the market. You can get a guaranteed death benefit, but you have to pay more in premiums. Because your money is directly invested in securities, it’s actually considered an investment (whole life is not) and is governed by securities laws.

When would a variable life insurance policy be right for you?

Basically, if you’re already maxing out your other tax-deferred investment vehicles and you’re fine taking on the risk. Although it is risky from the life insurance perspective (if the market crashes, so does your family’s future), it obviously shouldn’t be used purely for the insurance, rather as a tax-efficient tool with an insurance benefit.

Variable Universal Life

Variable Universal Life (VUL) is what happens when universal life and variable life have a baby. It combines the advantages of both of its parents to form a much more complex tool that can be beneficial, but only in the right hands.

Much like with universal life, the cost of insurance increases as the policyholder ages, but the premium payments are flexible. And just like variable life, the cash value can be invested in the separate accounts rather than the general account, giving the policyholder a little more investment control and a higher risk-return component.

The disadvantage of VUL is its complexity.

There are many added expenses due to dealing with separate accounts, which combined with the increasing cost of insurance, can cause the policy to be doomed from the start if it’s not planned and funded properly. This is especially an issue later if the intended use of the cash value is for retirement. If you don’t fund it enough, it lapses. If you fund it too much, it becomes a modified endowed contract and loses its tax-deferred status (although it’s important to note that any permanent life insurance policy can become a modified endowed contract if it’s overfunded too much.) This was meant to deter people from taking advantage of the tax-efficiency of permanent life insurance.


So, as you can tell, none of these are very popular with many personal finance personalities and bloggers. But I would argue that is mainly due to the complexity of their nature and the fact that the market of people who would benefit from them the most is so much smaller than with other forms of life insurance.

From my research and from my experience as an agent, there are advantages and disadvantages to each, meaning none of them are inherently bad products. However, it’s important to reiterate that the average Joe and Jane aren’t going to benefit from these very much due to situation and financial ability to fund them properly.

Barbara’s comment: In most cases it’s best to separate investing from insurance. Invest with retirement accounts and/or investment brokerage accounts. Buy inexpensive term life insurance to protect your dependents if you die.

Be knowledgeable if someone tries to sell you a financial product and always consider the fees and commissions you will pay to the seller.

Ben Luthi is a personal finance blogger, freelance writer, and the owner of Wealth Gospel (and a former life insurance agent).  He is passionate about helping others align their behaviors with their goals. He’s a chips and salsa connoisseur and his spirit animal is Warren Buffett.

What type of insurance do you have? Have you ever considered whole life, universal life, variable life, or other investment-based insurances?

image credit; google images_flickr

Check out my recent Asset Allocation Post as part of Financially Savvy Saturdays on Femme Frugality


  1. I agree with your conclusion that these types of products are shunned mainly because there is such a small percentage of the population that these make sense for. I also agree that in many cases, they are hard to decipher. I’ve been in the financial planning industry for close to 15 years and even when I get asked questions about these types of policies I get confused!

    Jon @ Money Smart Guides

    February 27, 2014

  2. @Jon, It’s frustrating to come across financial products that might have some interest for some folks, but they are inaccessible and difficult to understand. But you are correct that these complicated insurance products only make sense on rare occasions.

    Barbara Friedberg

    February 27, 2014

  3. @Jon, very true! For people that don’t have a group of trusted advisors from different perspectives (i.e. planning, tax, insurance, etc.), it may be better to stick with a simpler solution.

    Ben @ The Wealth Gospel

    February 27, 2014

  4. Thanks for the information. I have to admit, just reading through this made me feel overwhelmed! It definitely highlights the need for trusted advisors and not just the first person trying to make a sale.


    March 1, 2014

  5. @Sher, I agree, this information is quite a lot. Personally, I would just stick with a term life insurance policy to replace 5 to 10 times the main household bread winners income. For someone young, these policies are quite affordable.

    Barbara Friedberg

    March 2, 2014

  6. I have been hearing a lot about using Whole life insurance as a personal banking system, but the whole concept seems really confusing, and I’m not sure if it’s a good idea. Is it only for people who make a lot of extra money? Or could whole life insurance be practical it for someone who might just save a few hundred bucks a month? My husband and I don’t have any children (and aren’t planning on it) and we’re both financially independent even without each other, so taking out a life insurance policy for the actual life insurance itself is not really something we’re interested in at the moment…


    March 4, 2014

    • @Lisha, Whole life insurance does not sound like an appropriate product for you. It sounds like someone is trying to sell you a product with a high commission (for the seller) which you don’t need. You need to save in a regular bank, workplace retirement account, and/or discount brokerage account. It does not sound like you or your husband need any type of insurance as you are financially independent.

      Barbara Friedberg

      March 5, 2014

  7. Thanks for your honest response Barbara. I was wondering if life insurance agents just say it’s a good idea so they can make a buck. It seems I was right…


    March 18, 2014

  8. Somehow I feel it would be much safer and more practical to separate my insurance from my investments. Putting the two together makes me feel anxious.

    Jill Rogat

    March 17, 2014

  9. I’m not sure what’s worse the complexity of the situation or the fact that most insurance agents don’t know how to set up the policies properly? To take this one step farther, how a policy is designed and how the monies go into the policy make all the difference in the world. It changes the performance of the policy and also changes the commissions within the policy. You can bet that things are related. It’s a lot longer coversation but a very interesting one for people that appreciate the different uses of life insurance. For most people, term life insurance is the best option, at least to start.


    May 24, 2016

    • Dear QTL, It sounds like you know quite a bit more than average about insurance. It’s a complicated conversation when you look at the ‘insurance strategies’. I certainly agree that a plain vanilla term policy works for most. Thanks for chiming in.

      Barbara Friedberg

      May 25, 2016


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