Disadvantages of Universal Life Insurance

Universal life insurance comes with disadvantages, including complex management requirements, high fees and risk of policy lapse. These drawbacks can lead to lost coverage despite years of premium payments.

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Disadvantages of Universal Life Insurance

Written by Mark Fitzpatrick

Updated: February 26, 2026

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What Is Universal Life Insurance?

Universal life insurance is permanent life insurance with flexible premiums and adjustable death benefits. Policies typically last until ages 95, 100, or 120. This coverage includes a cash value component that grows based on the insurer's interest rates.

When you pay premiums, a portion covers insurance costs and fees. The remaining portion goes into your cash value account. You can adjust premium payments and death benefit amounts within policy limits.

You can access the cash value through loans or withdrawals while you're alive. Policy loans and withdrawals may reduce the death benefit and cash value, and may have tax consequences. Consult a tax professional for specific guidance.

What Are the Disadvantages of Universal Life Insurance?

If you're considering universal life insurance, it's important to understand that while it offers flexibility, it also comes with several drawbacks. Here are the main disadvantages of universal life insurance:

Complex Management Requirements

If you're used to set-it-and-forget-it insurance policies, universal life coverage requires much more hands-on attention. Unlike term life or whole life policies that operate automatically, you'll need to actively monitor premium payments, cash value balance, interest crediting rates and cost of insurance charges.

Good policy performance depends on making adjustments when the cash value grows too slowly. Failure to monitor can lead to unexpected premium increases or policy lapse.

High Fees Reduce Returns

Fees can reduce cash value growth. Premium expense charges cover sales and administrative costs. The cost of insurance (COI) is deducted monthly. Administrative fees cover policy maintenance and customer service.

Surrender charges apply if you cancel life insurance early. These fees are deducted before any growth happens, reducing money available for cash value buildup.

Rising Cost of Insurance Over Time

The COI within these policies increases as you age. Early years have relatively low COI charges, allowing cash value to build. Later years see substantial COI increases, requiring more funds to maintain coverage.

If the cash value doesn't grow as projected, you'll need to pay higher premiums to keep your policy active. This can create a financial squeeze in retirement when income may be lower, but life insurance costs are at their highest.

Risk of Policy Lapse

Policy lapse happens if you skip premium payments without sufficient cash value to cover the cost, or when growth doesn't keep pace with rising costs. Lapsed policies result in complete loss of coverage, with no death benefit paid.

Outstanding policy loans become taxable income if your policy lapses. You lose all premium payments made over the years.

Uncertain Cash Value Growth

Cash value grows based on the insurance company's annual interest rate. Actual rates vary based on market conditions. When interest rates are low, cash value grows slowly.

For indexed universal life, caps limit gains even when markets perform well. Variable universal life insurance involves investment risk and potential loss of principal. Growth rates shown in policy illustrations aren't guaranteed.

Cash Value Doesn't Pass to Beneficiaries

With the level death benefit option (Option A), beneficiaries receive only the policy face value when you die. The cash value you accumulated reverts to the insurance company. For example, with a $500,000 death benefit and $100,000 cash value, beneficiaries receive $500,000 total. The increasing death benefit option(Option B) adds cash value to the payout but comes with higher premiums throughout your policy life.

Who Should Consider Universal Life Insurance?

Despite the disadvantages of universal life insurance, this coverage works for some people. High-net-worth individuals may use it for estate planning and wealth transfer. Business owners can structure policies to fund buy-sell agreements or provide key person insurance. People seeking permanent coverage with premium flexibility may prefer this option over whole life insurance.

You need financial discipline to monitor policy performance and adjust life insurance premiums or death benefits when needed. Working with a financial advisor helps you understand policy mechanics and avoid common pitfalls that lead to lapse.

Is Universal Life Insurance Right for You?

Universal life insurance policies require careful evaluation of your financial goals and risk tolerance. The flexibility comes with management responsibility that many people underestimate. High fees and uncertain growth mean you could pay premiums for years and still lose coverage if you don't monitor carefully. For most people, term life insurance provides sufficient protection at lower cost.

Consider your ability to track policy performance and make adjustments over decades. If you want permanent coverage without active management, whole life insurance offers more predictability. Universal life insurance makes sense only when you need permanent coverage, understand the risks and have resources to sustain premiums even if cash value grows slowly.

Universal Life Insurance Disadvantages: FAQ

What is the biggest disadvantage of universal life insurance?

The biggest disadvantage is policy lapse risk. If cash value doesn't grow as projected or you skip too many premium payments, your policy can lapse entirely. You lose all coverage and premiums paid.

Can you lose money with universal life insurance?

You can lose money if your policy lapses. All premiums paid provide no benefit when coverage ends. Outstanding policy loans become taxable income upon lapse. Surrender charges may apply if you cancel early.

What happens to the cash value in universal life insurance when you die?

Cash value reverts to the insurance company when you die under the level death benefit option. Beneficiaries receive only the policy face value. The increasing death benefit option pays face value plus cash value but costs more throughout your policy life.

Is universal life insurance better than whole life insurance?

Neither is necessarily better. Universal life offers premium flexibility but requires active management. Whole life provides fixed premiums and guaranteed cash value growth with less oversight needed. Whole life works better for people seeking predictable permanent coverage.

Learn more: Universal Life vs. Whole Life Insurance

About Mark Fitzpatrick

Mark Fitzpatrick, a Licensed Property and Casualty Insurance Producer, is MoneyGeek's resident Personal Finance Expert. He has analyzed the insurance market for over five years, conducting original research for insurance shoppers. His insights have been featured in CNBC, NBC News and Mashable.

Fitzpatrick holds a master’s degree in economics and international relations from Johns Hopkins University and a bachelor’s degree from Boston College. He's also a five-time Jeopardy champion!

He writes about economics and insurance, breaking down complex topics so people know what they're buying.

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