A variable universal life (VUL) policy differs from a fixed universal life policy primarily because the VUL:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
VUL combines the flexible premiums and adjustable coverage of universal life with investment in separate-account subaccounts that behave like mutual funds. The policyowner directs where the premiums are invested and bears the investment risk, so the cash value and the coverage can fluctuate with investment performance. Fixed universal life instead credits interest at a rate declared by the insurer, subject to a guaranteed minimum, and the insurer bears the investment risk. Because the separate accounts are considered securities, VUL is also subject to securities regulation in addition to insurance regulation. The distinction between the two products turns on who bears the investment risk.
Why the other options are wrong
- A guaranteed minimum interest rate is a feature of fixed universal life, not VUL, where returns depend on the performance of the chosen subaccounts.
- A VUL policy can lapse if the cash value is insufficient to cover monthly deductions, even if premiums were paid in the past; no payment history guarantees the policy.
- VUL death benefits can be adjusted by the policyowner and, under a variable death benefit option, may change with the performance of the separate accounts.
Memory hook
VUL = universal life flexibility plus your own investment picks. You steer, you bear the bumps.