6 Disadvantages of Universal Life Insurance

Thang Truong
Thang Truong
Updated on:

Universal life insurance has many benefits, such as flexible death benefits, the option for cash value earned on the plan and the convenience of never having to renew these permanent options. However, there are some disadvantages of universal life insurance, too. Each life insurance option was created for different people who have different financial goals in mind. So below we’ll look at what some of those disadvantages are in more detail than we covered in our universal life insurance guide.

Cash Value Can Fluctuate with Markets on Certain Plans

One of the major benefits of universal life insurance is that you can build additional cash value on the plan above and beyond your death benefit. It’s a great option for supplementing or working towards savings goals like retirement funds.  

However, some plans might introduce an element of risk and instability you might not be comfortable with, leading to disadvantages of universal life insurance. Variable universal life insurance, for instance, ties your cash value earnings into specific investments you make in stocks and bonds. Indexed universal life insurance can tie your earnings into how a certain market index is performing, like the S&P 500. Many times, plans will have floors so that you’re not losing money. But if your investments or markets perform badly, you won’t be growing cash value.  

If you’re uncomfortable with the idea of tying your cash value amounts to how markets and investments are performing, you might want to look into whole life or guaranteed universal life insurance. Guaranteed universal life focuses on a fixed death benefit and premium, with no cash value. Whole life grows your cash value at a set schedule.  

Flexibility Can Mean a Reduced Death Benefit

Universal life insurance has flexible premium and death benefit options, as is the case with indexed and variable life insurance. However, one of the disadvantages of universal life insurance is that increased flexibility could lead to the temptation to borrow or withdraw the money. Depending on the stipulations of the plan, pulling money from these policies could reduce your death benefit and increase your premiums. So pulling the money might not be in your best interest.

Many people get a life insurance policy in the first place because they like the idea of a set amount of money going to their beneficiaries upon passing. If this is your primary goal with a life insurance policy, you might want to look into a guaranteed universal life insurance policy. These tend to allow you to only withdraw money from the policy through riders that stipulate specific situations in which you’re allowed to do so.

Universal Life Makes Less Sense for Those Who Don’t Want a Permanent Plan

It can be nice to know that once you have the plan, you’re set for life as long as you keep up on premium payments. No need to renew and risk getting higher premiums.  

However, one of the other disadvantages of universal life insurance is that some people prefer to have the plan for only a set amount of time. For instance, if you’re older, you might decide you don’t need a plan that can stretch on for 50 or 60 years. In cases where you don’t want a permanent option, that’s where term life insurance comes in. These plans usually go for only 10, 20, or 30 years. These shorter-term plans also tend to be less expensive than permanent life insurance.   

You Have to Keep Paying Premiums Until You Pass Away

Most universal life insurance polices require you to pay premium until you pass away to keep the policy in force because universal life insurance is a type of permanent life insurance. That could make it difficult to many of us. While we can keep up with premium payments when we are still working, it will become much more difficult for us to do so when we stop working and start withdrawing from our retirement fund. Premium payment will become a big expense in our retirement years and this will put the policy at risk.

If you are worried about this possibility, ask your agent or advisor for the scenario that you only need to pay for your universal life insurance policy for a period of 10, 20, or 30 years but your policy still provides lifelong coverage. For each coverage amount of a permanent life insurance policy, it is regulated that a maximize premium for the policy is allowed. This is necessary, especially for indexed universal life insurance or variable universal life insurance. Without the maximize premium amount, one can choose to pay a lot in premiums to increase the cash value account significantly, which will make it tax-inefficient for the government.

Since there are a maximum premiums allowed for universal life insurance policies, it can be structured in a way that you can pay the total maximum premiums in a set period of time of your choice, which can be 10, 20, or 30 years.

Not Wanting Cash Value Can Lead to Disadvantages of Universal Life Insurance

If you have other savings plans in place, it might not even make sense to have a life insurance plan that’s focused on a cash value component. The money you would be spending on the higher premiums of a permanent life insurance plan might be better placed in other options, like a retirement account.  

If this is the case for you, again, you might want to consider term life, which tends to be less expensive than universal life insurance on the whole. You might also focus on guaranteed universal life insurance, which was made to get the highest fixed death benefit at the lowest premium out of the universal life insurance types.   

Managing a Universal Life Insurance Policy Can Be Complicated

If you are the type of people who prefer “set and done”, universal life insurance, especially indexed and variable, might not be the best fit for you. Indexed and Variable universal life insurance policies come with a cash account, which accumulates over time and fluctuates based on the performance of the index or investment tied to them. And they also come with different types of investment and management fees. Tracking and monitoring the performance of the cash value account is not really a “set and done” thing.

If you really prefer “set and done” approach and want to have a permanent life policy, you should focus on guaranteed universal life insurance only. Guaranteed universal life insurance policy minimize the complication of cash account, thus making the policy management very simple.

Above are several disadvantages of universal life insurance, however, universal life insurance is the more popular type of permanent life insurance, and it has become more and more popular thanks to its flexibilities and its unique feature allowing us to greatly benefit from the tax-deferred nature for the investment earnings from the cash value account. Learn more about the advantages of universal life insurance here.

Final Thoughts

As you can see, there are several disadvantages of universal life insurance. If you want a more fixed death benefit and premium, you may have to look into guaranteed life insurance instead of variable or indexed. Also, if you want a shorter-term plan or cash value isn’t a priority, universal life insurance might not be the product type for you

Thang Truong

Thang Truong covers small business insurance and small business success at BravoPolicy. He is a licensed P&C insurance agent. Previously, he held product leadership positions at realtor.com, Capital One, NerdWallet, and Mulberry Technology. He holds a MBA degree from UC Berkeley - Haas School of Business.

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