How Variable Universal Life Insurance Works
You decide (up to limits regulated by federal tax law) when and how much premium payment to "pour in." The minimum premium is based on insurance company sales expenses, premium taxes, and the cost of pure insurance for your policy.
As you pay your premium, the insurance company deducts its sales expenses and premium taxes.
The remainder of your premium is credited to your cash value account. Each month, the company charges this account for its other expenses and the cost of pure insurance (net amount of risk coverage), or mortality cost.
You choose the sub-accounts in which your cash value is invested. These accounts are securities-based, though many policies offer a fixed account option.
Growth in your sub-account investments can "pump up" your cash value.
With the potential for growth comes the possibility of loss. If your investment choices perform poorly, your cash value could go "down the drain."
If your remaining cash value is not sufficient to cover expenses and the cost of pure insurance, and you do not pour in more premium, the policy amount may then have to be reduced, or your policy will lapse. This would be similar to crushing the container at the top.
You may take a policy loan in an amount not to exceed the policy's cash surrender value less the annual loan interest. Repayment replenishes your cash value, but there may be a tax liability if the policy terminates before the death of the insured. Any loan balance outstanding (plus interest due) at your death is deducted from the policy amount paid to your beneficiary.