Why Is Universal Life Insurance Bad?

Universal life insurance is annual renewable term life insurance with a savings component, called a cash value account. But universal life insurance may not be the best type of insurance for you. Make sure you understand why some people think that universal life insurance is bad.

Non-Guaranteed Assumptions

Universal life insurance is based entirely on assumed expenses and interest rates. If the insurance company's assumptions are incorrect, you could lose your life insurance policy. There are limited guarantees in this type of policy.

No Forced Payments

While flexibility is sometimes seen as a benefit in a universal life policy, it is also a liability. Being able to pay whatever you want (within limits) allows the policyholder to pay too little premium without realizing the long-term impact on the policy. Because policy assumptions can change from year to year, the flexibility in the amount of premiums you pay could result in your policy lapsing late in life when you cannot afford to make the much higher, required premium payments to keep the policy in force.

Complex

Universal life is, by nature, a very complex product. Interest earned to the policy can be calculated several different ways, and vary according to the company you are doing business with and the type of universal life policy you are buying. Policy charges do not need to be fixed, the cost of insurance can be increased at the discretion of the insurance company, and the decision to choose a level death benefit option or an increasing death benefit option requires a thorough understanding of how insurance companies charge for death benefits.

References

• "Life Insurance"; Kenneth Black, Jr., Harold D. Skipper, Jr.; 1994
• "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007