What are the "bad sides" of a Universal Life policy?

Question

I have heard people talk about the good and bad sides of this policy. What are the bad? I cannot remember

Answer 1

The Price!

Answer 2

Assuming you want to keep the policy for your entire life, it will cost more than a term policy and a whole life policy. If you plan on keeping it for your whole life, make sure that you are paying a large enough premium every year so that the contract pays up when you are older.

One of the biggest disadvantages of UL compared to whole life is that it will tend to have a lower interest rate. This is due to the flexible premium nature of the policy which creates dilution and disintermediation risk for the insurer (basically it means people are more apt to put money in when the crediting rate is higher than the market and may take money out when rates in the market are higher). Conversely, you do get premium flexibility by having a UL policy.

An argument against UL & whole life is that you should "buy term and invest the rest." Studies have shown that the vast majority of people who go this route do not actually save the extra money, or they save it but then spend it. At the same time I will say that many companies out there do not credit very competitive rates on their insurance policies (but there are a few, especially mutual companies) that credit more competitive rates since they don't pay out profits to shareholders (since they don't have any).

Answer 3

The premium is based on a projected earnings rate for the investments inside the policy. If the earnings rate for this projection was too high the premium will be too low to keep the policy in effect for life. Te policy holder is responsible for the earnings inside the policy.
If the earnings are too low the policy holder could be called upon to either pur more money in the ploicy, reduce the death benefit or let the policy lapse.
This can be overcome with a guaranteed death benefit rider attached to the policy. Such a rider guarantees the death benefit and costs extra but is well worth the price.

Answer 4

Hi, your friendly insurance guy here again. :)

The downsides to UL policies are:

1. They cost more out of pocket in the short run than Term policies.

2. If you do not buy the UL policy from a company with a "guaranteed no-lapse" provision in the policy that says "as long as you pay the level premium the policy can never lapse" the cost can rise over time or the policy can lapse on you.

3. The savings feature is typically not spectacular compared to other ways to save money. It's certainly better than not saving at all, though.

The upsides:

1. Permanent insurance for lower monthly cost than Whole Life.

2. Works well for Survivorship Life Insurance situations where two people's lives are insured and the benefit does not pay out till both die. I dealt with this today for a client. Two good uses of this would be:

A. Some "well-to-do" couple has wills that leave everything to each other, but when the second one dies an estate tax burden will ensue. Survivorship life would provide funds upon the death of the second person in the couple that could be used to pay estate taxes.

B. a person finds himself in the circumstance that his parents will need to be supported financially. HIs siblings are deadbeats and won't help. He takes on the responsbility of caring for his parents all by himself and, with their consent, purchases a survivorship policy on his parents. He takes care of them for the rest of their lives, and when the parents are both gone, the proceeds help him defray the cost of having been the sole caretaker of his parents.

There are other good uses for Universal Life.

Feel free to write if you have questions.

Answer 5

A Universal Life policy has two components: A "savings" part and an "insurance" part.

The idea is that if you die, you get the insurance. If you live, you get the savings, or use the savings to pay the insurance bill.

Disadvantages: it's expensive, compared to other forms of insurance and investing. The interest rate on such an investment is low, and fees are high, compared to term life insurance and your own investments (like a Scottrade account for stocks, etc.)

There are some tax advantages, which may or may not hold up over time, but the overall upside is still lower than the downside.

I encourage people to learn about their investments and control them, rather than "have the salesman do it for you". Universal Life is a commission based "do it for you" product.

Answer 6

the bad sides of a UL policy well the only thing that could be bad is the higher cost of the insurance the pros far out weigh the cons in my book I mean what would you say about collecting a tax free income in your retirement age in the $70 to $80 thousand dollar a year range.
A Life Insurance Specialist

Answer 7

The investment side could not keep up with the premiums that go up as the person ages each year. Then the smaller premiums you once paid get bigger & bigger. Sometimes unaffordable.