Problems With Universal Life Insurance

There are many bad things about universal life insurance, but the worst is what happens to that cash value when you die. The only payment your family will get is the death benefit amount. Plus, if you ever withdraw some of the cash value, you will subtract that same amount from your death benefit amount.

Disadvantages Of Universal Life Insurance

Some disadvantages of getting universal life insurance include higher premiums, surrender fees, lapse potential and uncertain returns.

Does Universal Life Insurance Expire?

A guaranteed universal life (GUL) insurance policy offers a death benefit and payments that will not increase with time. You select an age at which the policy terminates (such as age 90, 95, 100, 105, 110, or 121). choosing a higher period will increase the premium.

What Happens When A Universal Life Insurance Policy Matures

Universal Life policies provide coverage for the entirety of your life, typically around your 100 – 125th birthday. In addition to standard life coverage, this policy can provide you with a cash account savings benefit, and maturity can therefore happen in more than one way:

When you die, the policy will mature and expire. It will pay any benefits to your beneficiaries. Cash value in the policy may or may not be paid to the beneficiary- this depends on the option selected at the time of application.

If you become terminally or chronically ill, you are often given the option to “cash in” your insurance policy for a portion of the death benefit, minus administrative fees. However, this option may not be available all carriers, so it is crucial to check into this before applying for coverage.

What Is Universal Life Insurance And How Does It Work?

Universal life (UL) is a form of "permanent" life insurance. It is designed to protect for long periods, usually for the person named "insured" in the insurance policy. Permanent life insurance has a cash value, or savings component, from which the policy owner can access money.

Often the policy owner (policyholder) and the person insured are the same people. But they may not be. Someone could own and pay the premiums on an insurance policy in which another is insured. 

Universal Life is different from other types of permanent life insurance because it doesn't have a set premium. The policy owner can pay whatever you want within the Minimum and maximum premium stated in the policy. 

The Minimum and maximum premiums are based on age, sex, medical history, and the coverage amount. There can be a trade-off when you pay the Minimum.

How Does Universal Life Insurance Work

All permanent life insurance policies have three pieces that must fit together:

  • Premium: The money paid into the policy first covers its cost of insurance protection and administrative costs. If you pay above the minimum premium, the excess goes to the savings component or cash value. If you do not pay a premium, policy charges are taken out of the cash value.
  • Cash value: The cash, account value, is a savings or investment part used the policyholder. The cash value is increased with either interest earned the insurance company's investment portfolio or gains from an investment portfolio that the policyholder selects (in the case of a variable universal life policy). Cash value interest and yields you do not pay tax unless they are taken out or surrendered.
  • Death benefit: Funds payable to beneficiaries at the insured's termination of Life are known as the death amount or face value. Universal Life has two basic death benefit procedures. One is a level death benefit, called the specified or face amount. The second is the face amount plus the cash value. More of your payment will go toward building the cash value; in the second, more premium will increase the death benefit. Many of the companies offer more death benefit variations as a rider.

Death benefits that are received as a lump sum are typically income-tax-free to the beneficiary. Universal life policies have two different "schedules" to determine the cost of insurance value and additional policy charges. These charges are the things your premiums pay for, or if they are not used to paying premiums, they are taken from the cash value. You most often can find them on your insurance statements. 

The "current schedule" is actually based on the cost of the insurance company's claims, investment results, and cost. The"guaranteed schedule" shows the maximum amounts you can be charged. The insurance company can lower or raise the current schedule, but not more than the guaranteed maximum stated in the policy.

With a Universal Life policy, you can adjust premium payments up or down—a higher premium payment will increase the cash value. In contrast, a lower premium or no payment may decrease it, depending on how much interest is being credited to the cash value account. This flexibility is convenient if you need to lower premiums based on financial circumstances or if you want to increase premiums to capitalize on the tax-deferred growth in the cash value. Other insurance types, such as permanent insurance, and whole life, have a fixed premium schedule that can't change.

Though you can reduce or pause premium payments, it's essential to monitor the policy—if you don't pay sufficient premiums, policy charges can eat away at the cash value until there's little or nothing left, potentially causing your policy to lapse.

Surrender Period and Charges

Universal life policies usually charge a penalty for canceling the policy or withdrawing more than a certain percentage of the cash value within an established period. Surrender periods are at the insurer's discretion and can go up to, basically, up to 15 years. The surrender charges and how they will be calculated are disclosed in the policy.