How does a Variable Universal Life Insurance policy differ from a Universal Life Insurance policy?

A Variable Universal Life Insurance policy is distinguished from a Universal Life Insurance policy primarily by its investment flexibility. In a Variable Universal Life policy, the policyholder can allocate their cash value among a variety of separate investment accounts, which can include stock and bond funds, money market funds, or other options depending on the insurer's offerings. This feature allows for potential growth of the cash value based on the performance of the selected investments, providing policyholders with greater control and an opportunity for higher returns compared to the fixed interest options available in traditional Universal Life policies.

Universal Life Insurance typically offers a cash value that earns a guaranteed interest rate, along with the option to vary premium payments and death benefits, but it does not include the same level of investment choice and market risk as found in Variable Universal Life. Thus, the correct answer emphasizes the unique capacity for investment diversification within Variable Universal Life policies, allowing owners to tailor their policy according to their investment goals and risk tolerance.