Like its general account siblings, CAUL and EIUL, VUL is a flexible premium policy that allows the policyholder to direct the investment of the cash value among separate investment accounts managed by the carrier (or an affiliate or independent money manager) offered under the policy. The product may also offer the carrier’s general account as an investment option.
These are security-based policies. The policy itself is a security, because the lifetime values and (in some cases) the death benefit are determined by the investment choices made by the policy owner among the “funds.” The funds (except for the guaranteed interest account) are separate accounts, generally not subject to the claims of the carrier’s creditors in the event of insolvency. While this protection depends on the state law applicable to the carrier, most states (and many foreign jurisdictions) have such a law. By contrast, the general account of the carrier isn’t such a separate account and, accordingly, is subject to claims of the carrier’s creditors.
In exchange for the flexibility to direct the investment of cash value in the funds, the VUL policyholder takes on the risk of market loss and the burden of managing allocation of those funds. Hybrid versions of the product offer no lapse guarantees as well as the investment flexibility and growth potential of VUL.
Generally, the ideal setting for VUL is when the policyholder will: (1) minimize the death benefit relative to the premium, and (2) fund the policy rapidly. This approach reduces the net amount at risk and takes some (maybe a lot) of the volatility out of the product over time. The much less than ideal setting for VUL is when the policyholder wants to fund a large death benefit with a minimum premium!
As with other products, many VUL policies allow a blend of base policy and term as a way to reduce the premiums for the death benefit.