Variable universal life, or VUL, is permanent life insurance where the cash value is invested directly in funds that work a lot like mutual funds. When the market goes up, the cash value goes up. When the market drops, the cash value drops with it, and there's no floor under it. The two kinds of policies I work with handle a bad year differently. Whole life credits a guaranteed rate plus dividends, and an IUL, which means indexed universal life, ties its credits to a market index but won't credit less than zero in a down year.
My first policy was a VUL. I was 19 and selling cars, and an agent who bought a car from me sold me one. I didn't know anything about money. I funded it for a couple of years and then stopped, because at 19 I had other things I wanted to spend money on. Since I was young and the death benefit was small, the insurance costs stayed small, and the policy carried itself for close to 20 years before I took out the little bit of cash value and canceled it. It did fine. I'd have done better investing in the market directly, but nobody was talking me into that at 19.
The other story is my wife's grandparents. They owned a restaurant most of their lives and sold it when they retired in 2006. Their financial adviser was a life insurance salesperson who put all of their retirement money into one variable policy. Then 2008 came. The account lost about half its value while they were withdrawing from it every month to live on, and they ran out of money. A little money in the market would have been fine. The problem was having all of it there, at the one stage of life when there's no time to wait for a recovery. Carlo Viqueira and I retold both of these stories, along with the rest of the VUL's weak spots, on a LIFE Pod episode about variable universal life.
I don't sell VUL, and cost is a big part of why. You pay for the life insurance and for the fund expenses, and the commissions on these policies tend to run high. The illustrations often assume high returns, which makes those costs easy to overlook. To sell one, an agent needs a securities license on top of an insurance license, but passing those exams doesn't make someone a portfolio manager. I've seen VUL illustrations with the money spread across dozens of funds, a little in each, with no real plan behind it.
There's a second problem for anyone who wants to borrow against the policy. A policy loan is borrowed against your cash value. If the market takes half of that cash value away, the loan doesn't shrink with it, and the policy can get squeezed between the loan it still owes and a cash value that fell. Like any policy loan, it also reduces your cash value and death benefit while it's outstanding. Some VULs also need more premium after a big drop to keep the death benefit in force, which lands right when you're least likely to have the money. And if a policy lapses with a loan outstanding, the gain can become taxable in that same year.
I'm a licensed insurance broker, not an investment advisor, so take this as my view rather than investment advice. If you want market exposure, I'd rather see you get it directly, where the costs are usually lower. Buying term insurance and investing the difference is a reasonable choice for a disciplined investor. If you want some of the market's upside with a floor under it, an IUL does that, and the annual reset and the zero floor shows how it handles a down year. There may be someone a VUL fits. I just don't know who that person is.
If you own a VUL right now, pull your latest annual statement and find the cash value, any loan balance, and the total charges for the year. Then ask the carrier for an in-force illustration, which means an updated projection that starts from your policy's real values today, at a lower assumed return, and see whether the policy still lasts as long as you need it to.