Disadvantages of Universal Life Insurance You Should Know About

"Universal life insurance" that sounds comforting doesn’t it? Well, let’s not get ahead of ourselves. This insurance truly is universal in that it will cover you forever – no end date, no matter your age, so long as you pay your premiums. All good so far. Another cool feature is that it has a built-in savings account, which we will discuss later. So, cool features, enduring coverage – you should sign up, right? Perhaps… but perhaps not.

How does Universal Life Insurance Work?

In theory, Universal life insurance is a cool concept. Your monthly premium gets divided, with one aspect covering the actual life insurance and the other going into the built-in savings account. You get flexibility to decide how much of the premium goes toward insurance, and how much goes toward savings, but there is an insurance minimum that has to be paid.

When you get into the nitty-gritty of it there are also choices amongst the types of universal life: indexed universal life, guaranteed universal life and variable universal life.

The Cons

The choices amongst universal life policies are interesting but all of them have shortcomings. For instance, indexed universal is tied to the stock market, so it could be amazing but it could be terrible, market depending. Who wants to risk their life insurance coverage like that? Guaranteed universal is separated from the stock market, so your premiums are steady, but if your premiums never adjust, the cash value of the savings aspect in this type of policy is worthless because there is nothing going toward that savings account. The variable universal policy allows you to invest a portion of your funds, the cash portion, so again you are gambling. Beyond the investing risk of a variable universal policy, investing costs money: aka, fees. Investing fees can be massive and once the insurance company takes their cut of the earnings, you could be left with less than you expected.

Universal Life Insurance Benefits

Your life insurance is there to protect and provide for your loved ones when you pass. Universal life insurance tries to combine insurance coverage with a savings account, but across all the options encourages you to invest your cash value or have no cash value.

If you simply purchase term life insurance, say a 15 or 20 year policy, you can pay very low premiums and take whatever other money above and beyond that that would have been going toward your universal life policy and sink it into a TFSA, RRSPs or even invest it on your own into a low-medium risk fund through your bank for significantly smaller fees. Keeping this money separate from your insurance coverage is a good idea if you are comfortable setting aside and investing your own savings.

At the end of the day universal life insurance might seem like a trendy and forward-thinking insurance option, but the truth is, it’s not for everyone.

Getting Out

If you have a universal life policy and want to cancel it, you will be hit with some impressive surrender fees. You can even face these fees if you reduce your coverage but still keep the policy open.

There are a lot of disadvantages that come with universal life insurance so don’t be fooled when you see a new insurance product that advertises cool features. It’s important that you read all the literature you can on an insurance policy before you climb on board with a company. A good way to avoid having an undesirable policy pushed on you is to go through an insurance broker, like LSM Insurance. Brokers are independent and not beholden to any one company. Insurance agents, however, are only trying to sell you products their company provides.

Hi! I'm Stevie, and I'm interested in everything that surrounds the topic of personal finance. I hope my articles will be of some use to my readers!