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Universal Life Insurance Pros And Cons

What are the pros and cons of purchasing universal life insurance? While universal life insurance is a type of permanent life insurance and carries a cash value, the premium is divided into a savings portion and an investment portion. Investments into stocks and money markets carry risk, and universal life insurance policies have advantages and disadvantages based on your needs.

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What Is Universal Life Insurance and How Does It Work?

As with all forms of permanent life insurance, universal life insurance is designed to protect your family or beneficiaries against the financial burdens associated with your death. This can include paying for funeral services, unpaid medical bills, continued child support and education payments, mortgage payments, loss of income, debts and much more.

Where universal life insurance differs from other types of insurance is in how it is invested.

Understanding how these policies operate will help you determine the pros and cons of owning a universal life insurance plan.

Benefits of a Universal Life Insurance Policy

Depending on your unique situation, a universal life insurance policy could be a good fit. While insurance plans will vary based on your insurance provider, some of the benefits of owning one of these policies can include:

  • Adjustable premiums and benefits over the term of the policy
  • Greater flexibility than a traditional whole life policy
  • Cash value that accrues in tax-deferred savings over time
  • If the policy’s stock market, mortgage, bond and money market investments are doing well, there will be significant increases in its cash value
  • Interest rates may vary, but never drop below a minimum (which is often around 4%)
  • You can eventually pay your premiums directly from your plan's investments
  • Ability to choose two death benefits
  • Typically lower premiums than other whole life insurance policies

What Are the Downsides of Universal Life Insurance?

As with any other investment option, there are financial risks to buying a universal life insurance policy. Some of the downsides of owning one of these plans can include:

  • If you pay too low of a premium for too long, the policy can lapse
  • Missed payments may jeopardize certain features of the policy
  • If the policy’s stock market, mortgage, bond and money market investments are not doing well, there will be significant decreases in its cash value
  • Return caps may be limiting if you want to put money into separate investments and insurance policies
  • typically higher premiums than term life insurance

What Are Other Types of Universal Life Insurance?

Other types of universal life insurance like indexed universal life insurance give policyholders the opportunity to divert all of their policy’s cash value to a stock market index. This carries the highest risk, but also the highest potential rewards. These policies can also feature benefits in the form of tax advantages and various riders for guaranteed premiums and death benefits.

As with all types of life insurance policies, the cost of your premiums can be affected by your age, health, insurance provider and your number of dependents. Speak with your life insurance company about all options before you commit to a universal life insurance plan.

*Applications for insurance may be subject to acceptance by insurer. Rates and coverage amounts will depend upon the carrier selected.

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