Understanding Your Variable Universal Life Insurance Policy

Have you inherited a Variable Universal Life (VUL) insurance policy from your parents and are wondering what to do with it? VUL policies can be complex, but understanding the options available to you can help you make the best decision for your financial situation.

What is a Variable Universal Life Insurance Policy?

A VUL policy is a type of permanent life insurance that provides both a death benefit and a cash value component. The cash value portion of the policy grows on a tax-deferred basis, meaning you don’t pay taxes on the gains until you withdraw them. However, unlike traditional life insurance policies, VUL policies invest the cash value in various sub-accounts.

Options After Inheriting a VUL Policy

As the new policyholder, you have several options to consider:

1. Cash Out and Pay Taxes

This option involves withdrawing the current cash value, which is $73.5k in your case. However, you would be responsible for paying taxes on the gains since the policy was launched. In your case, the taxable amount would be around $46k ($73.5k – $27.5k).

2. Continue Paying Premiums

You can choose to continue paying the annual premium of $1200 to keep the policy active. This will allow you to continue growing the cash value and death benefit, but it also means you will continue to pay the fees associated with the policy.

3. Convert to a Different Life Insurance Policy

Through a 1035 exchange, you can convert your VUL policy to another type of life insurance policy, such as a term life or whole life policy. However, it’s important to research different policies to find one that meets your needs and minimizes fees.

Factors to Consider When Making a Decision

When deciding what to do with your VUL policy, consider the following factors:

Age and health: If you are older or have health concerns, continuing the policy may make sense to ensure financial protection for your loved ones.
Financial goals: If you have other financial goals, such as saving for retirement or paying off debt, cashing out the policy and investing the funds elsewhere may be a better option.
Fees: VUL policies typically have higher fees than other types of life insurance. Consider the annual premium and any other associated fees before deciding.
Investment objectives: Determine if the investment strategy and sub-accounts of the VUL policy align with your risk tolerance and investment goals.

Seek Professional Advice

It’s always advisable to consult with a licensed insurance agent or financial advisor to discuss your options in detail and make an informed decision regarding your VUL policy. They can provide personalized recommendations based on your specific circumstances and help you understand the implications of each option.