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While generally a policy for the experienced and moderate-to-aggressive investor, Variable Universal Life insurance policies have grown popular as a means for policy owners to take their investment risk tolerance and desire for control, management responsibility, and opportunity into the realm of their life insurance policy. Presumably the result of a thoughtful consideration of suitability for such a product, a decision to buy a Variable Universal Life policy should be accompanied by an awareness that it is in all respects a Universal Life design but for the obligation to direct premiums and underlying cash value into sub-accounts. These sub-accounts, in turn, include the insurer’s proprietary investment accounts as well as clones of offerings from the major mutual fund vendors. Sub-account offerings will typically range from aggressive  to conservative, allowing the policy owner to direct an asset allocation that is appropriate for his or her risk tolerance. And, because the policy owner is taking responsibility for investing the underlying cash value, Variable Universal Life policies generally have no minimum guaranteed rate of return.

Whether on purpose or by accident, the early architects of Variable Universal Life took their cues from Whole Life insurance for product design and illustration systems. That is, the death benefit of a Variable Universal Life insurance policy has two components: (1) the cash value and (2) the additional amount needed at any moment in time to equal the death benefit

This is both a necessary and a perfect design for Whole Life policies whose many internal working parts are guaranteed.  But when we visualize this theoretical cash value in Variable Universal Life insurance policies, the unthinkable can happen: the cash value can actually decline because of market activity or failure to maintain a sufficient funding premium to compensate for the ever-increasing risk charges. Once a variable policy’s cash value declines from its theoretical and intended inexorable lifetime path (from $0 to approximately equal to the death benefit itself by the time the insured reaches age 100), the policy design requires that the net amount at risk increase rather than follow the decrease curve.