What scenario can lead to the lapse of a VUL policy?

A Variable Universal Life (VUL) policy is designed with both an insurance component and an investment component. One critical aspect of maintaining this policy is ensuring that the cash value is sufficient to cover the monthly cost of insurance. When a policyholder stops making premium payments, the policy relies on its cash value to cover the insurance costs.

If the cash value diminishes to a point where it cannot sustain the ongoing costs of insurance—such as mortality charges and administrative fees—the policy may lapse. This can happen especially if the investment component is underperforming or if the insurance costs increase unexpectedly. Therefore, if the cash value is insufficient to cover the monthly costs after premium payments cease, the policy will eventually lapse.

This situation emphasizes the importance of closely monitoring both the cash value and the insurance costs involved in a VUL policy to prevent unintended lapses. The key takeaway is that lapsation occurs when the financial components of the policy are insufficient to meet ongoing obligations once premium payments are stopped.