Risks of Variable Universal Life Insurance

Variable universal life insurance is one of the most complicated life insurance products. It is one type of permanent life or cash value insurance that features not only lifetime protection but also asset accumulation.

Variable universal life insurance policy could be a very powerful product that can benefit your family if properly used. But it is not for everyone. There are various kinds of risks associated with it. You should be aware of all those risks before you make the investment. Here we list some of the risks:

1. Contract values are not guaranteed.

Your benefits are not guaranteed, and may be entirely dependent on the investment performance of the variable investment options you select. The variable investment options you choose may not perform to your expectations. Poor investment performance could cause your Contract to lapse and you could lose your insurance coverage. Only the fixed rate option provides a guaranteed rate of return.

2. Increase in Charges

When you are reading the product illustration, you may see two columns of cash values. One is based on current charge, and the other is based on maximum charge. Although you may be suggested focus on the current charge, the insurance companies reserve the right to increase each current charge, up to the maximum charge, without giving any advance notice, and this can greatly affect your cash value.

3. Risks of Using the Separate Account as a Short Term Savings Vehicle

Because the Contract provides for a cash accumulation in the separate account as well as a death benefit, you may wish to use it for various financial planning purposes. However, the contract is designed to provide benefits on a long-term basis. Using the cash value in the separate account too soon, your policy may lapse or you may not accumulate the value you need.

4. Risks of Taking Withdrawals

Accessing the values in your Contract through withdrawals may significantly affect current and future Contract values or death benefit proceeds and may increase the chance that your Contract will lapse. Whenever a withdrawal is made, the death benefit will immediately be reduced by at least the amount of the withdrawal. A surrender charge may be deducted when any withdrawal causes a reduction in the basic insurance amount. It is important to note, however, that if the basic insurance amount is decreased, there is a possibility that the Contract might be classified as a Modified Endowment Contract. Withdrawal of the cash surrender value may have tax consequences.

5. Charges on Surrender of the Contract

You may surrender your Contract at any time for its cash surrender value while the insured is living. A surrender charge will be deducted from the surrender proceeds. In addition, the surrender of your Contract may have tax consequences.

6. Risks of Taking a Contract Loan

Accessing the values in your Contract through Contract loans may significantly affect current and future Contract values or death benefit proceeds and may increase the chance that your Contract will lapse.

There are still other major risks associated with variable universal life insurance products such as potential tax consequences and tax law changing. An investor should understand all of the risks before investing in this type of products.

You can find more discussions about the risks of variable universal life insurance and other information by visiting our website Variable Universal Life Insurance Decode. The goal of our websites is to share our knowledge about permanent life insurance with people so they can make cautious decision.

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