The Disadvantages of Universal Life Insurance
Universal life insurance is a type of life insurance which combines aspects of term life insurance and whole life insurance. Like whole life insurance it can be kept for a policy holder's entire life if sufficient minimum premiums are paid in. As with term life insurance the amount of coverage and amount paid in premiums can be adjusted to fit the policy holder's needs and ability to pay and adjusted over time.
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Cash Value Fluctuates
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The cash value that a universal life insurance policy has will fluctuate depending on the performance of the insurance company's investments. While there is usually a minimum amount of interest regardless of how poorly the investments do lower returns can cause policy holders to see their cash values drop and they might need to increase premiums to keep the policy from lapsing.
Lower Cash Value Returns
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A major draw back to universal life insurance is that the cash value returns that a policy holder earns on in his policy might not be as great as the returns he could have had if he invested the money on his own. This is because the fees for an insurance company are higher than most mutual funds. This is only a disadvantage if the policy holder actually would invest the money he saves and most individuals do not actually do this. Universal life insurance is generally more expensive than term life insurance but less expensive than other types of permanent life insurance. The amount a policy holder chooses to put into a universal life policy will also be a factor. This is because universal life allows policy holders the flexibility to choose the amount they will put into the policy in order to build up cash value. Insurance companies have the ability to raise the mortality charge to the policy maximum and often do so in response to hidden expenses.
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High Commissions Paid to Broker
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The amount of commission that an insurance broker receives on universal life insurance is higher than on other types of life insurance. In some instances it can be as high as a year's worth of premiums. This might indicate that universal life insurance has a lot of overhead and is thus expensive. In addition it indicates that brokers might have an incentive to push this type of life insurance over others.
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