Universal Life Insurance: A Look at Universal Life Insurance Pros and Cons 2023

A Look at Universal Life Insurance Pros and Cons

A Look at Universal Life Insurance Pros and Cons

Avoid assuming that you should purchase a universal life insurance policy. The pros and cons of universal life insurance can be researched with the aid of HealthMarkets. You can decide if it’s the best type of life insurance for you by getting a sneak peek before you buy. Learn more about the positives and negatives of universal life’s premium payments, cash value, and death benefits by reading on.


Introduction to Universal Life Insurance.
With universal life, two key components of the policy—the premium and the death benefit—can be altered, and this has an impact on the cash value of the insurance. Whole life insurance’s savings account features are combined with term life’s pure insurance components to create a universal life. The general benefits and drawbacks of universal life insurance are listed below.

A Look at Universal Life Insurance Pros and Cons


1. To provide more flexibility than a whole life insurance.

2. With a variable interest rate, cash value increases, potentially increasing returns.

3. More chances for the policy’s cash value to rise.



  1. Typically, for a policy to continue to be in effect, it must have a positive cash value.
  2. Additionally, variable rates could result in low-interest charges on the cash value.
  3. lacks the whole life insurance option’s guaranteed level premium.



Universal Life Adjustable Premiums: Pros and Cons.

Being able to choose when and how much premium you pay is one of the most appealing aspects of universal life insurance, provided that payments are made in accordance with the IRS’s life insurance payment guidelines for the maximum amount of excess premium payments that may be made as well as the minimum amount necessary to keep the policy active. Once your policy has amassed enough cash value and you have made your first regular payment, you have the option to change the amount of your premium payment. However, this flexibility has some disadvantages as well. Let’s discuss the advantages and disadvantages of switching your premium payment method for universal life insurance.


Advantages: Unlike other permanent life insurance policies, universal life can be adjusted to meet your needs when your finances are tight or your cash flow is strong. You might be able to:

More frequently than necessary, pay higher premiums.
Less frequently or even not at all, make premium payments.
Pay premiums in cash or with the cash value.

Cons: The cash value of the policy will be negatively impacted by paying the bare minimum premium, less than the target premium, or skipping payments. Making these choices could:

Paying the minimum premium only covers the cost of the policy; it does not provide any excess premium to allow the policy to accrue cash value.
The insurance company determines a “target” premium that it believes will be sufficient to cover the cost of coverage while also increasing the cash value of the policy, and can be used to slow down or stop this process. Less money will be paid into the policy’s cash value if you pay less than the target amount. The cash value is used to pay for the cost of providing you with insurance when you miss a payment. The cash value will decrease if you repeat this action frequently.
Only using the cash value to pay the premiums will eventually cause the policy to run out of cash value, at which point your coverage may cease and the policy may lapse.


Universal Life Policy Pros Cons: Accessing the Cash Value

A portion of your premium payments and the variable interest rate at which the policy grows are used to create cash value in a universal life insurance policy. Therefore, more money contributes to the policy’s cash value when you pay higher premium payments. The cash value increases faster if the policy’s interest rate rises above expectations. However, there are some benefits and drawbacks to using your policy’s cash value.

Pros: You don’t need to qualify to take out a loan on a life insurance policy, unlike a bank loan where you must do so based on your credit. This is typical of all cash-value insurance policies. The loan is also not due back to you. You typically don’t have to pay income tax on the loan, which is another benefit. You can make a partial withdrawal if you only need to take out a small amount of money without surrendering the policy or canceling it. Cash withdrawals in part are typically tax-free.

The cash value of the policy’s cash value is the maximum amount you can borrow. Additionally, your cash value is used as collateral but the funds for the loan are provided by the insurance company, not you. The loan is not free money, even though you are not required to pay it back. For the loan, you must pay interest. The interest will increase and deplete your cash value if you don’t at least pay the interest, which could cause your policy to lapse. The loan balance plus interest will be deducted from your beneficiary’s death benefit if the loan is not repaid when you pass away.

Within the first few years of the policy’s life, it is typically impossible to withdraw money from the actual cash value. Some policies permit a permanent withdrawal of up to 90% of the cash value; however, this permanently reduces the death benefit. Income taxes are frequently applied to withdrawals that lessen your death benefit.

Universal life is an adjustable type of permanent life insurance that allows you to make changes to two main parts of the policy: the premium and the death benefit, which in turn affects the policy’s cash value. Universal life combines the pure insurance elements of term life with the savings account features of whole life insurance. Below are some of the overall pros and cons of universal life insurance.


Lowering the Death Benefit of a Universal Life Policy.
Benefits: You can adjust your death benefit as needed to accommodate your financial and personal needs, typically at any time. For instance, you could decide to lower your death benefit once your children start working if the primary goal of the benefit was to replace your income while they were still young. In the same way, reducing the policy’s death benefit can be beneficial because doing so typically results in paying lower premiums, which would be helpful in circumstances like earning less money.

Cons: By lowering the death benefit, you will also give your beneficiary less money upon your passing than you had anticipated when you purchased the policy. The drawback is that if you were to pass away and your family required significant financial support, the payout from the policy might not be enough to keep your household afloat during the years when they required the most income replacement.

A Look at Universal Life Insurance Pros and Cons
A Look at Universal Life Insurance Pros and Cons


Increasing the death benefit of a universal life insurance policy.
Benefits: A higher death benefit, of course, means that your beneficiary will receive more money when you pass away. If your family had more money, they could either pay off their debts faster or make it through tougher financial times.

Cons: Since you have to go through the insurance company’s underwriting requirements once more, increasing your death benefit typically necessitates getting a medical exam. Given that the policy’s face value will be higher, your premium rate will most likely rise.

How the death benefit for Option B of Universal Life differ from Option A.
The death benefit structure of universal life insurance has both advantages and disadvantages. By selecting either Option A or Option B, you can decide how the death benefit will be distributed. Option B offers an increasing death benefit equal to the policy’s face value, while Option A offers a level death benefit for the duration of the policy.


Level Death Benefit, alternative A.
The main benefit is that you pay fewer premiums than you would under Option B for the same death benefit. This is because as the cash value of the policy increases, you pay less for pure insurance, which lowers your risk to the insurance provider. You pay premiums for the smaller pure insurance amount rather than the higher death benefit amount covered by the policy. As a result, you would pay $400,000 for pure insurance if your death benefit was $500,000 and your cash value was $100,000. The policy functions similarly to term life insurance when only the insurance premiums are paid.

Cons: The benefit of lower premiums—you only pay for pure insurance—comes at the cost of your beneficiary receiving a payout that is equal to the policy’s face value. Consequently, if the policy’s death benefit is $500,000, this is equal to the face value and would be the sum paid out (less any unpaid loans and interest). Over and above what is necessary to keep the policy in force, you would need to pay excess premiums if you wanted to increase the death benefit.


Increasing the Death Benefit is option B.
Benefits: By receiving both the face value and the cash value amount, this option provides your beneficiary with a greater financial advantage. If there are no outstanding loans or interest, your beneficiary would receive a payout of $600,000 using the $500,000 face value and $100,000 cash value example.

Cons: This option’s drawback is that premiums are paid on the full face value of the policy for the duration of its life, regardless of how much cash value the policy has. As a result, the premium would rise in order to maintain the larger amount of coverage as the face value or death benefit was increased over time.

Also Read:

Do I need life insurance for my children?


Find more information from official website of the United States government: https://www.usa.gov/health-insurance


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