A 62-year-old retiree sits across from an advisor with a VUL illustration described as “life insurance with retirement upside.” The account value looks promising, the premiums appear flexible, and the sales presentation makes the policy sound like it can protect a family while functioning as a private investment account. The retiree wants to know one thing: is this a good deal, or is the risk buried in the fine print?

The answer depends less on the sales pitch than on the policy's funding, charges, investment performance, surrender schedule, and ability to stay in force. This guide to VUL life insurance pros and cons takes a direct view. VUL can fit a narrow group of financially experienced buyers, but it's a poor substitute for straightforward insurance and low-cost investing for most households.

What VUL Life Insurance Actually Is

Variable universal life insurance, or VUL, is permanent life insurance with a market-linked cash-value account. The policy combines a death benefit with investment subaccounts selected by the policyholder. Those subaccounts may include equity funds, bond funds, and money-market options. Unlike a traditional savings account, the cash value is tied to investment performance and isn't principal-protected. MetLife's VUL explanation describes this basic structure and the connection between account value and market performance.

The contract works through a series of deductions. Your premium does not go directly into an investment account. The insurer first applies amounts to the cost of insurance, mortality and expense charges, administrative expenses, and other policy costs. The remaining amount is directed to the investment subaccounts you choose.

The policy has three moving parts

1. Insurance charges: These support the death benefit and generally become more significant as the insured ages.
2. Administrative and contract expenses: These cover policy administration and may include transaction or service charges.
3. Cash value allocation: The remaining premium is invested in available subaccounts, where values rise or fall with the underlying investments.

That structure explains both the appeal and the danger. A strong market can increase cash value and may give the policyholder more flexibility. A weak market can reduce the account while the insurer continues deducting charges. The SEC's investor bulletin on variable life insurance warns that policyholders must maintain sufficient premiums or cash value to cover policy fees and expenses. If the account falls too low, the policy can lapse and terminate.

Whole life takes a different approach. It generally uses fixed premiums and more predictable cash-value treatment. Term life is simpler still, providing a death benefit for a defined period with no cash value. VUL trades some predictability for investment control and premium flexibility.

For a plain-language overview of how variable life contracts operate, My Policy Quote's 2026 variable life guide offers a useful starting point. Read it as background, not as a substitute for the actual prospectus, policy contract, and current in-force illustration.

VUL compared with other common policies

The core lesson is simple. A VUL isn't a brokerage account with free life insurance attached. It's an insurance contract that permits investment exposure, and the contract survives only if the funding and cash value support its continuing charges.

Why Investors Choose VUL in the First Place

The sales rationale is easy to understand. VUL offers permanent coverage, flexible premiums, adjustable death benefits, tax-deferred cash-value growth, and access to equity-like investment subaccounts. For an investor who wants lifelong insurance and is comfortable making allocation decisions, those features can look attractive.

The problem is that each benefit has a condition attached. The coverage remains permanent only if the policy stays in force. The cash value grows tax-deferred, but layered policy and investment charges reduce the amount available to compound. Premium flexibility exists, but lowering or skipping payments doesn't eliminate the cost of insurance and administration. The policy may draw down cash value to cover those charges until the account can no longer support them.

The stated rationale versus the actual requirement

A retiree may be told that a VUL can provide retirement income through withdrawals or loans. That strategy requires the policy to remain adequately funded after withdrawals, investment losses, and rising insurance costs. A policy loan can also reduce cash value and leave the owner with a serious problem if the contract later lapses.

Other sales files cite estate-tax liquidity, executive bonus planning, or a supplemental retirement fund. Those objectives can be legitimate, but VUL isn't automatically the most efficient tool for any of them. Estate liquidity may involve a simpler permanent policy or an appropriately structured trust. Executive compensation may use a compensation arrangement with clearer economics. Retirement accumulation may work better through available tax-advantaged accounts and a taxable brokerage account.

Practical rule: Don't buy VUL because it combines several features. Buy it only when you can identify a specific insurance need that simpler products won't meet.

Universal life has been marketed for decades as a flexible alternative to traditional whole life. The historical experience is instructive. Universal life emerged in the late 1970s and surged in the early 1980s. By 1985, it represented about 38% of individual life insurance premiums in the United States, according to the Society of Actuaries' historical account of product development. Early policies benefited from crediting rates that were often in the double digits or high single digits, which made cash value look especially compelling.

Today's buyer shouldn't assume that historical appeal translates into present suitability. Recent Society of Actuaries data covering 33.5 million policy exposures, $8.5 trillion in face-amount exposures, and 1.3 million lapse terminations shows why funding discipline matters. In that study, the overall policy-basis lapse rate was 3.9% for whole life, 5.3% for universal life, and 8.5% for variable universal life. The SOA's 2015 to 2021 persistency study also found that lifetime secondary guarantees had lapse rates 45% lower than comparable non-lifetime secondary-guarantee products.

The product isn't categorically defective. It's unforgiving. If you can't absorb the fee load, market volatility, and long-term monitoring requirement, VUL is the wrong product.

For a legal discussion of the product's investment characteristics and risks, this analysis of variable life insurance pros and cons provides additional context.

The Costs Hidden Inside a VUL Policy

A VUL illustration can display attractive gross investment returns while obscuring how much never reaches the policyholder's cash value. Start with the cost of insurance, or COI. This charge generally rises as the insured ages, so a policy that appears affordable early can become far more expensive after retirement, when income is less flexible.

The insurer may also deduct administrative expenses, premium charges, transaction costs, mortality and expense risk charges, and underlying subaccount expenses. Investopedia's explanation of VUL fees and risks reports that subaccount management fees commonly range from 0.5% to 2%. A separate analysis of life insurance policy fees found that mortality and expense charges often range from 0.25% to 0.90% annually.

These deductions work together. For a closer examination of measuring this drag, see this cost-to-equity ratio analysis.

Gross premium isn't net investment

A policy funded with $10,000 annually for ten years receives $100,000 in gross contributions. That amount is not the policy's cash value. The insurer deducts policy expenses and insurance charges before the remaining money reaches the selected subaccounts. Those subaccounts then reflect market performance after their own expenses.

As COI rises with age, deductions can consume a larger share of the account. Administrative charges reduce it further, while a weak market adds investment losses. A policyholder can make every planned premium payment and still end up with cash value substantially below gross contributions.

The result is a two-part pressure. Charges reduce the account, and a smaller account provides less money from which future charges can be collected. The owner may need to increase premiums, reduce the death benefit, change allocations, or accept a higher risk of lapse.

What to demand before buying

Request the actual prospectus and a current illustration. Require a written breakdown of:

• Cost of insurance: Ask how the charge changes with age and whether the insurer may adjust rates under the contract.
• M&E expenses: Identify the annual charge separately from subaccount expenses.
• Investment expenses: Review every available subaccount, not only its gross historical performance.
• Administrative charges: Check for monthly fees, premium charges, transaction costs, and special service fees.
• Surrender schedule: Determine how much cash value you would lose if you exited in each policy year.

An illustration is a model based on assumptions, not a promise. The policy's outcome depends on market returns, fees, funding, loans, withdrawals, and insurer charges. If the recommendation works only under favorable investment assumptions, reject it. Term insurance paired with disciplined investing may provide a cleaner comparison, especially when the VUL's layered fees and surrender schedule do not serve a specific estate or insurance need.

Market Risk and Cash Value Behavior You Should Plan For

A VUL can lose value at the exact time a retiree needs dependable cash. After premiums cover insurance and administrative costs, the remaining amount goes into investment subaccounts. Those subaccounts may hold stocks, bonds, or money-market investments, but their labels do not guarantee stability. A market decline can reduce the policy's cash value and weaken its ability to support future coverage.

The path of returns matters more than an attractive average. Consider a hypothetical policy with $100,000 in its investment account at the end of year one. If the market falls 30% in year two, the account drops to $70,000 before considering any withdrawals or additional policy costs. A later 30% gain would raise that balance only to $91,000, not back to $100,000. The owner must earn more than the loss to recover the original balance, and the policy has less capital participating in that recovery.

The sequence problem matters

An early decline can force a funding decision before the owner has time to recover. The policyholder may need to increase premiums, reduce the death benefit, change investment allocations, or accept greater lapse risk. Selling subaccounts after a decline can lock in losses. Borrowing or withdrawing from the account can leave even fewer assets available for a later rebound.

A strong long-term market average does not repair every poor sequence. A VUL is a contract with continuing insurance obligations, not a brokerage account that can wait for better conditions. Review the policy's projected cash value under weak, moderate, and favorable returns. Reject a recommendation that works only under optimistic assumptions.

The cost of insurance also becomes more significant as the insured ages. Later premiums may need to support more of the death benefit, leaving less available for investment. A policy that seemed flexible at issue can require disciplined funding in retirement.

The investment account does not get to pause the insurance charges while the market is down.

Death benefit, loans, and retirement exposure

The death benefit generally remains payable only while the policy stays in force under its contract terms. A falling cash value can therefore force an owner to add premiums, reduce coverage, surrender the policy, or borrow against the account.

Loans create a separate tax risk. If the policy later lapses with an outstanding loan, the amount treated as distributed may become taxable income. The SEC investor guidance on variable life policies warns that loans, withdrawals, and poor investment performance can reduce cash value and contribute to lapse.

Retirees should not treat VUL cash value as routine income without stress-testing the contract. They have less employment income to replace underfunding and less time to recover from a market decline. A policy loan may appear tax-free while the contract remains healthy. If the policy fails, that apparent income can become a taxable liability while insurance protection disappears.

Surrender Charges and the Lapse Trap for Retirees

A retiree who wants out of an underperforming VUL may discover that the policy's value isn't the amount shown in the account statement. The insurer may deduct a surrender charge before paying the cash surrender value. These charges commonly apply during the first 10 to 15 years, and some contracts use schedules that decline gradually before reaching zero. The Wall Street Journal's discussion of variable life insurance describes policies with surrender charges that can begin around 7% to 10% of cash value and, in some contracts, continue for 15 years or more.

Consider a policyholder who bought the contract during peak earning years and reaches retirement with disappointing cash value. The owner stops premiums, expecting the account to fund itself. The insurer continues deducting COI and administrative expenses. If the account falls below the amount needed to support the policy, the carrier sends a lapse notice. The owner then faces an unpleasant choice: add money that wasn't budgeted, reduce the death benefit, or surrender and accept the contractual deduction.

Why the tax issue can surprise owners

A lapse with an outstanding loan can create taxable income even though the owner didn't receive a new cash payment at the time of lapse. The policy's tax basis, cash value, loan balance, and prior distributions all matter. IRC §7702 issues can become serious when a policy terminates after years of borrowing or underfunding, so a tax professional should review the numbers before any surrender or exchange.

Don't assume a reduced paid-up option or extended-term rider solves the problem. Those provisions may change the coverage, eliminate the cash-value strategy, or provide less protection than the owner expects. Read the actual contract and request an in-force ledger that shows guaranteed and non-guaranteed values.

The Wall Street Journal example cited a surrender charge of up to 5.404% of specified amount and illustrated a first-year penalty of $27,020 on $100,000 of premiums. Those figures belong to that prospectus, not every VUL contract, but they show why early exit can produce a materially different result from the account value displayed on a statement.

The question retirees should ask

Ask the carrier for the current cash surrender value, the net amount available after all charges, the loan balance, the tax basis, and the amount required to prevent lapse. Then compare those figures with the policy's death benefit and the cost of replacing coverage.

A surrender charge is normally waived when the insured dies because the death benefit becomes payable. That doesn't make holding a failing policy sensible. It means the contract can impose a financial penalty precisely when an owner needs liquidity most.

For a discussion of policy exchanges and potential replacement issues, review this guide to life insurance 1035 exchanges before signing any exchange paperwork.

How VUL Compares With Term Life Plus a Brokerage Account

For many buyers, the cleanest comparison is not VUL versus whole life. It's VUL versus term insurance plus a brokerage account. The first option bundles insurance and investing inside one complex contract. The second separates the death benefit from the investment portfolio, making each cost and result easier to inspect.

A term policy provides protection for a defined period and doesn't build cash value. A brokerage account provides direct ownership of investments and generally offers more accessible liquidity. A VUL can provide permanent coverage and tax-deferred cash value, but the owner pays for that combination through insurance charges, administrative costs, investment expenses, and surrender restrictions.

Compare the job each product performs

The right comparison must use the same insurance need and the same premium budget. Ask how much of the VUL premium pays for permanent coverage and how much reaches the subaccounts. Then price the appropriate term policy and invest the difference through a diversified brokerage account.

A practical pressure test

• Insurance need: Do you need coverage for a temporary obligation, or do you have a documented permanent need?
• Estate or business purpose: Is there a specific liquidity requirement that simpler insurance cannot address?
• Funding capacity: Can you maintain the policy through retirement if investment returns disappoint?
• Investment behavior: Will you monitor allocations and policy charges, or will the contract sit unattended?
• Exit plan: What happens if you need to surrender, exchange, or reduce funding?
• Tax analysis: Has a qualified professional modeled withdrawals, loans, lapse, and death-benefit treatment?

Term-plus-investing often wins for households whose primary objective is affordable protection and flexible asset accumulation. VUL deserves consideration only when permanent insurance serves a documented purpose and the buyer understands that investment control comes with continuing policy obligations.

Mis-Selling, Unsuitable Recommendations, and When to Call a Lawyer

The most serious VUL problems often begin before the policy is issued. A sales representative may present the contract as a guaranteed retirement account, a college-funding vehicle, or a tax-free income machine. Those descriptions can conceal the fact that subaccount values may fall, charges continue during downturns, and premium flexibility can end in lapse.

Common warning signs include:

• Guaranteed-retirement language: The representative describes projected cash value as though it were promised.
• Missing downside analysis: The illustration shows favorable assumptions without explaining how a market decline affects lapse risk.
• Unexplained replacement: An existing term or permanent policy is replaced without a clear comparison of benefits, costs, and surrender consequences.
• In-policy financing: Loans or premium financing make the recommendation appear affordable while masking interest, collateral, and lapse risk.
• Compressed funding: A single-bonus premium or unusually large contribution is used without explaining how the contract will be maintained afterward.
• Tax-free income claims: The representative promises retirement income without modeling the effect of loans, withdrawals, and policy failure.

For securities recommendations, FINRA Rule 2111 addresses suitability, including whether a recommendation is reasonable for the customer and consistent with the customer's profile. The SEC's Regulation Best Interest framework also focuses on reasonable-basis, customer-specific, and quantitative suitability obligations for broker-dealers. The exact legal analysis depends on the advisor's role, registration, product structure, state law, and the facts of the sale.

Elder-abuse rules may also matter when a retiree was pressured, confused, isolated from family members, or persuaded to move retirement assets into an unsuitable insurance-security product. A replacement within 36 months, funding through a 1035 exchange, an undisclosed surrender schedule, or a policy sold shortly before a major liquidity need deserves immediate review.

The two-year contestability window is another issue to understand. It concerns the insurer's ability to investigate certain representations after issuance, but it doesn't eliminate potential claims involving unsuitable advice, misrepresentation, breach of duty, or improper replacement. Do not assume that the passage of time answers every legal question.

Preserve the file before you decide what to do

Gather the documents in one place:

1. Original proposal and illustrations: Keep every version provided at or before issue.
2. Policy and prospectus: Include all riders, amendments, and delivery receipts.
3. Account statements: Preserve statements showing premiums, charges, cash value, loans, and subaccount performance.
4. Replacement documents: Collect 1035 exchange forms, comparison statements, and notices.
5. Communications and recordings: Save emails, text messages, notes, and recorded sales calls.
6. Tax records: Include basis information and documents showing withdrawals or loan activity.

A securities attorney can assess whether the recommendation matched your age, finances, objectives, risk tolerance, and ability to fund the contract. Kons Law's discussion of annuity suitability guidelines provides related context for evaluating unsuitable insurance-based investments.

If you would like a free consultation to discuss the investment loss recovery process in more detail, call Kons Law Firm at (860) 920-5181 for a FREE, NO OBLIGATION consultation.

If a VUL was sold to you as guaranteed retirement income, a low-risk investment, or a policy that could be safely underfunded, Kons Law can review the sales file, policy records, and account history for potential misconduct or unsuitable advice. Visit Kons Law to request a free consultation about your options for pursuing recovery.