With so many types of life insurance available, it can be challenging to choose the best one for you. Among the most popular permanent life insurance policies are Variable Life Insurance (VLI) and Universal Life Insurance (ULI). While both provide lifelong coverage and allow you to adjust premiums, they differ significantly in terms of how they grow your cash value and the level of risk you take on.
In this blog, we will break down the key differences between Variable Life Insurance and Universal Life Insurance so that you can make an informed decision based on your financial goals, risk tolerance, and lifestyle.
What Is Variable Life Insurance (VLI)?
Variable Life Insurance is a type of permanent life insurance that not only provides a death benefit to your beneficiaries but also includes a cash value component. The cash value grows based on the performance of investments you select. These investments can range from stocks and bonds to mutual funds. The value of the cash component can fluctuate depending on the performance of the chosen investments.
Key Features of VLI:
- Investment Options: You can choose the type of investments (stocks, bonds, mutual funds) where your cash value is allocated.
- Potential for High Growth: If your investments perform well, your cash value can grow quickly.
- Risk: The cash value may decrease if the selected investments perform poorly, meaning you have to be comfortable with market risk.
- Flexible Death Benefit: You can adjust the death benefit, within limits, depending on your needs.
What Is Universal Life Insurance (ULI)?
Another kind of permanent life insurance that provides flexibility with regard to premiums and death benefits is universal life insurance. However, unlike Variable Life Insurance, ULI has a fixed interest rate for its cash value. This means the growth of your cash value is more stable and does not fluctuate based on market performance.
Key Features of ULI:
- Fixed Interest Rate: Your cash value earns interest at a fixed rate set by the insurance company.
- Steady Growth: Since the cash value is not linked to market performance, your cash value grows at a steady, predictable rate.
- Flexibility with Premiums: As your needs evolve, ULI lets you modify both the death benefit and your premium payments.
- Lower Risk: Because the growth is not tied to investments in the market, there is less risk of your cash value decreasing.
Key Differences Between Variable Life Insurance and Universal Life Insurance
1. Growth of Cash Value
The primary difference between Variable Life Insurance and Universal Life Insurance is how the cash value grows over time.
Variable Life Insurance (VLI):
- The cash value is tied to market performance, so it has the potential to grow faster in a strong market.
- You have the option to select high-risk, high-reward investments or safer, lower-return options.
- Because the cash value is subject to market fluctuations, your policy’s cash value can increase or decrease based on the performance of the selected investments.
Universal Life Insurance (ULI):
- The cash value grows at a fixed interest rate, providing stability and predictability.
- You are not exposed to the risks of market volatility, making ULI a more conservative option.
- Growth is generally slower compared to VLI, but it offers the security of a guaranteed minimum rate.
2. Risk and Control
Variable Life Insurance (VLI):
- Higher Risk: The cash value is subject to market risk. Your cash value can drop if your investments don’t do well. However, with higher risk comes higher potential rewards, meaning you can achieve greater returns if the market does well.
- More Control: VLI gives you control over your investments. You can choose how to allocate your cash value across a variety of investment options (stocks, bonds, mutual funds). If you’re comfortable with managing investments, this can be appealing.
Universal Life Insurance (ULI):
- Lower Risk: With ULI, you are shielded from market risk. The insurer sets a guaranteed growth rate for your cash value. This makes ULI a safer option for those who are risk-averse or want predictable growth.
- Less Control: You don’t have the same level of control over investments. The insurer manages the growth of the cash value, and you receive the benefits of their fixed-rate program.
3. Flexibility
Both Variable Life and Universal Life Insurance offer flexibility in how premiums and death benefits are structured, but the extent of this flexibility varies.
Variable Life Insurance (VLI):
- Flexible Premiums: You can adjust how much you pay toward your premiums (within the limits of the policy).
- Flexible Death Benefit: You can adjust the death benefit amount, but it may affect the premiums or cash value.
- Investment Flexibility: You choose the investment options, and can change them as needed, giving you more control over your cash value’s growth.
Universal Life Insurance (ULI):
- Flexible Premiums: You can also adjust your premiums in ULI, allowing you to pay higher or lower premiums based on your financial situation.
- Flexible Death Benefit: The death benefit can be increased or decreased over time, depending on your needs.
- Fixed Growth: While you have flexibility in premiums and death benefits, the cash value growth is less flexible, as it is based on a fixed interest rate.
4. Cost
Variable Life Insurance (VLI):
- Higher Costs: Since VLI includes an investment component, it typically comes with higher fees for managing the investments. The maintenance of the investment alternatives often entails administrative fees.
- Investment Management Fees: These fees can vary depending on the funds you select and can impact your overall cash value growth.
Universal Life Insurance (ULI):
- Lower Costs: Generally, ULI is more affordable than VLI because it doesn’t require the same level of investment management. The fees for administration and the insurance component are usually lower.
- No Investment Fees: ULI doesn’t have separate investment management fees since there’s no active choice of investments on your part.
Which One Is Right for You?
Consider Variable Life Insurance (VLI) if:
- You’re comfortable with taking higher risks for potentially higher returns.
- You want to actively manage your policy’s investments and have control over your cash value’s growth.
- You’re looking for the potential for greater growth in the long term and are willing to handle market fluctuations.
Consider Universal Life Insurance (ULI) if:
- You prefer a more predictable and stable policy that isn’t affected by market ups and downs.
- You want the flexibility to adjust premiums and the death benefit amount, but without worrying about market risk.
- You want a lower-risk option for growing your savings while protecting your family.
Final Thoughts
Both Variable Life Insurance and Universal Life Insurance offer valuable permanent protection and flexibility, but the decision ultimately depends on your risk tolerance, financial goals, and how hands-on you want to be with managing your policy.
At Oros Life Insurance, we are committed to helping you choose the right policy based on your needs. Whether you prefer the control and potential growth of Variable Life Insurance or the stability and predictability of Universal Life Insurance, we’re here to help guide you every step of the way.
Want to Learn More?
ContactOros Life Insurance today to find out which life insurance policy suits your goals and lifestyle.
