Every time someone tells me they’re using their Variable Universal Life (VUL) insurance policy as an investment vehicle, I cringe. Not because life insurance is inherently bad—but because VULs are often misunderstood, misused, and misrepresented.
The Allure of the “Investment” Life Insurance
VULs are marketed as the best of both worlds: life insurance protection and market-based investment growth. Sounds great, right? But here’s the problem: most people don’t realize the complexity, risks, and long-term costs involved.
Unlike traditional investments, VULs come with:
- High fees (mortality charges, administrative fees, fund expenses)
- Market risk (your cash value can shrink in a downturn)
- Policy lapse risk (especially if the market underperforms and you stop funding it)
- Opaque performance (returns are often hard to track and compare)
What Kitces Has to Say
Michael Kitces, a leading voice in financial planning, breaks it down in his article, “Bank On Yourself Review – A Personal Loan From A Life Insurance Company (And Not Infinite Banking)”. While the article focuses on whole life and the “Bank on Yourself” concept, the underlying message applies to VULs too: life insurance is not a bank, and it’s not an investment account.
Kitces emphasizes that:
Life insurance loans are not “free money”—they’re loans, with interest, and they reduce your death benefit.
The internal rate of return on life insurance is often lower than traditional investments, especially in the early years.
Using life insurance as a personal bank or investment vehicle often requires perfect execution over decades to work as advertised.
The Real Purpose of Life Insurance
Life insurance is meant to protect your loved ones, your business, or your estate, not to replace your 401(k). When structured properly, permanent life insurance can be a powerful tool for:
- Estate planning
- Tax diversification
- Legacy creation
- Liquidity in retirement
But using it as your primary investment strategy? That’s a risky bet.
What I Recommend Instead
If you’re considering a VUL or already own one, ask yourself:
- Do I understand the fees and risks?
- Am I funding it adequately to keep it from lapsing?
- Do I have a clear exit strategy or long-term plan?
And most importantly: Have I compared this to other, simpler investment options?
Final Thoughts
I’m not anti-life insurance. I’m pro-transparency, pro-simplicity, and pro-strategy. If you want to build wealth, start with a solid investment plan. If you want to protect your family, get the right insurance. Just don’t confuse the two.