Universal Life Insurance
The Flexible Alternative to Whole Life?
My friend is a freelance graphic designer whose income is a rollercoaster. He wanted permanent life insurance but worried about the rigid, fixed premium of a whole life policy during his slow months. His advisor showed him Universal Life (UL). With UL, he could pay more into the policy during great years, building up cash value faster. Then, during a lean year, he could pay a much smaller premium, or even skip a payment, letting the cash value cover the policy’s costs. This flexibility to adjust payments to match his fluctuating income made it the perfect fit for him.
Adjusting Your Premiums and Death Benefit: The UL Advantage
Your Policy, Your Rules
My cousin, a sales rep, had a massive commission check one year. With her universal life policy, she made a huge extra premium payment, max-funding it to turbocharge her cash value growth. Two years later, she had a baby and decided she needed more coverage. She was able to increase her death benefit (after proving good health). This ability to change her payments and coverage to match her life is the core advantage of universal life. It’s a dynamic policy for a dynamic life, unlike the fixed-for-life structure of other permanent insurance.
The Dark Side of Universal Life: Policies Imploding Due to Low Funding
The Danger of Paying Only the Minimum
My uncle bought a universal life policy in the ’90s. The agent said, “Just pay this low minimum premium, and you’ll be fine.” For years, it worked. But he never increased his payments. Meanwhile, the internal cost of insurance rose as he aged, and interest rates fell. The small premium was no longer enough to cover the costs. The policy started eating its own cash value to survive. Last year, he got a letter stating his policy would lapse in 18 months unless he paid a massive lump sum. It’s a cautionary tale: underfunding a UL policy is a recipe for disaster.
Understanding Universal Life Cost of Insurance (COI) Charges
The Invisible Bill You Pay Every Month
Think of your universal life policy as a bucket. Your premium is the water you pour in. But every month, there’s a small, invisible charge that gets taken out: the Cost of Insurance (COI). This is the pure cost for your death benefit that year. This cost is low when you’re young but automatically increases every single year as you get older. If the interest you’re earning isn’t higher than the rising COI, your policy’s cash value will shrink. Understanding that this cost is always rising is the key to properly funding your policy for the long haul.
Guaranteed Universal Life (GUL): Permanent Coverage Without the High Cash Value Focus
Like Term Insurance, but for Your Entire Life
My aunt wanted life insurance that would absolutely, positively be there when she died, but she didn’t want to pay the high premiums for a cash-value-focused whole life policy. She chose a Guaranteed Universal Life (GUL) policy. It’s a stripped-down version of permanent insurance. As long as she pays her fixed, affordable premium every month, the $250,000 death benefit is guaranteed to be there, whether she lives to 90 or 120. There’s very little cash value, but that’s the point. It’s pure, lifelong death benefit protection for the lowest possible cost.
Is Universal Life Insurance Keeping Up With Rising Costs?
Why Your Old Policy Needs a Check-Up
My parents’ friend bought a “current assumption” universal life policy in 1995. The illustration showed that based on the high interest rates of the time, his policy would be self-funding in 15 years. But interest rates have been low for decades. His policy never performed as projected. The internal costs, which increase with age, are now much higher than the interest being credited. He still has to pay premiums 25 years later to keep it from lapsing. This is why you must review a UL policy annually; it’s not a “set it and forget it” product.
Funding Your UL Policy: Minimum vs. Target vs. Maximum Premium
Three Speeds for Your Financial Engine
When I saw a UL illustration, it showed three premium levels. The agent explained it like this: The minimum premium is just life support; it barely keeps the policy from lapsing in the early years and is very risky long-term. The target premium is the amount recommended to keep the policy healthy for life under current assumptions. The maximum premium is the most the IRS lets you pay without turning the policy into a tax-disadvantaged investment. To build cash value effectively, you want to pay somewhere between the target and maximum, not the risky minimum.
Universal Life Option A vs. Option B: What’s the Difference?
Level or Increasing? Choosing Your Death Benefit Path
My advisor showed me two UL policy structures. With Option A, the death benefit is a level amount, say $500,000. As my cash value grows, it makes up a larger portion of that death benefit, reducing the net amount of insurance the company is on the hook for. This is cheaper and maximizes cash value. With Option B, the death benefit is the face amount plus the cash value. It’s more expensive, but the death benefit constantly grows. I chose Option A because my primary goal was accumulating cash value, not a rising death benefit.
Using Universal Life Cash Value for Emergencies
Your Flexible Financial Backstop
Last winter, my friend’s furnace died, and he needed $7,000 for a new one. His emergency fund was a little low. Instead of putting it on a high-interest credit card, he took a loan from his universal life policy. He had been overfunding it for years, so he had plenty of cash value. The process was quick, the interest rate was reasonable, and it didn’t affect his credit score. This easy access to liquidity for life’s unexpected turns is a powerful, often overlooked benefit of a properly funded UL policy.
Can You Still Lose Money in a “Guaranteed” Universal Life Policy?
“Guaranteed” Only if You Follow the Rules
My neighbor bought a Guaranteed Universal Life (GUL) policy with a “no-lapse guarantee” to age 100. He thought it was foolproof. But a few years in, he took a policy loan for a home repair and then started making inconsistent, partial premium payments. He didn’t realize that doing this voided the no-lapse guarantee. His policy reverted to a regular UL, and the cash value wasn’t enough to sustain it. He lost the policy. A GUL is only guaranteed if you pay the exact specified premium, on time, every time, without fail.
Universal Life vs. Whole Life: The Flexibility vs. Guarantee Trade-off
The Adjustable-Rate vs. Fixed-Rate Mortgage of Life Insurance
I think of it this way: Whole Life is like a 30-year fixed-rate mortgage. The payment is set in stone, and you know exactly what you’ll have and when. It’s rigid but predictable. Universal Life is like an adjustable-rate mortgage. You have the flexibility to pay more or less, and your interest rate (and costs) can change. This flexibility is powerful but requires you to actively manage it. If you crave guarantees and simplicity, choose Whole Life. If you want flexibility and are willing to be diligent, Universal Life can be a better fit.
When Does Universal Life Make More Sense Than Term?
When Your Insurance Need Is for “Forever”
My friends used a term policy to cover their mortgage and their kids’ college years—a temporary need. But my other friend has a child with special needs who will require care for his entire life. A term policy that expires in 20 years wouldn’t work. She needs insurance that is guaranteed to be there, no matter when she passes away. For her, a permanent product like Universal Life was the only option. It makes sense when the financial need you’re covering won’t disappear after a set number of years.
Monitoring Your Universal Life Policy: The Annual Review You MUST Do
Don’t Ignore Your Policy’s Report Card
A UL policy is not a crock-pot; it’s a sensitive machine that needs monitoring. Every year, you get an in-force illustration that is your policy’s report card. It shows the current cash value, the costs being deducted, and the interest being credited. Most importantly, it projects how long your policy will last based on these current numbers. My agent taught me to review this with him annually. One year, we saw a potential issue and decided to slightly increase the premium to keep it on track. Ignoring this annual review is the number one mistake UL owners make.
The Interest Rate Risk in Traditional Universal Life Policies
The Achilles’ Heel of Old UL Policies
When my dad’s friend bought his UL policy in the 1980s, interest rates were over 10%. The policy illustrations looked incredible, projecting massive cash value growth. But for the last 20 years, interest rates have been historically low. The policy never came close to earning what was projected. The low interest credits struggled to keep up with the rising internal insurance costs. He had to pay much more in premiums than he ever expected just to keep it alive. This is the central risk of UL: your policy’s health is tied to interest rates you can’t control.
Universal Life Illustrations: Understanding the Guaranteed vs. Non-Guaranteed Columns
Plan for the Worst, Hope for the Best
When I looked at a UL illustration, I saw two main columns. The “non-guaranteed” column showed the policy performing beautifully, based on an optimistic 5% interest rate. But my eyes went to the “guaranteed” column. This showed the policy’s performance at the minimum interest rate allowed in the contract (e.g., 2%). It looked much less impressive. A smart buyer bases their decision on the guaranteed numbers. If the policy still works in the worst-case scenario, then you have a solid plan. Anything extra from the non-guaranteed side is just a bonus.
Can Universal Life Insurance Be a Good Retirement Savings Tool?
A Complex Alternative to a 401(k)
A high-income colleague uses a UL policy for retirement savings. He already maxes out his 401(k) and Roth IRA. He overfunds his UL policy to the legal limit, building a large bucket of cash value that grows tax-deferred. In retirement, he plans to take tax-free loans from the policy to supplement his income. It’s a complex strategy that only works if you’re a disciplined saver with a long time horizon. For most people, traditional retirement accounts are simpler and better. But for the right person, it can be a powerful tax-advantaged savings vehicle.
Surrender Charges in Universal Life: How Long Are You Locked In?
The High Cost of an Early Exit
Three years after buying a UL policy, my friend decided he wanted out and asked to get his cash value back. He was shocked to learn about surrender charges. He had $5,000 in cash value, but the surrender charge was $4,000, so he would only get $1,000 back. These charges are highest in the early years (often the first 10-15) and gradually decrease to zero. They are how the insurance company recoups the high upfront costs and agent commission. It’s a stark reminder that UL is a long-term commitment, not a short-term savings account.
The Tax Benefits of Universal Life Insurance Explained
The Same Powerful Trio as Other Permanent Policies
My accountant simplified the tax benefits for me. He called it the “tax-advantaged trio.” One: your cash value grows on a tax-deferred basis. You don’t get a 1099 for the interest earned each year. Two: you can access this cash value through policy loans, which are generally not considered taxable income. Three: the death benefit is paid to your family completely free of federal income tax. This combination of tax-deferred growth, tax-free access, and a tax-free payout is the core tax advantage of any permanent life insurance, including Universal Life.
Universal Life Riders: Adding Benefits Like LTC or Critical Illness
Upgrading Your Policy for Modern Risks
When my mom bought her UL policy, she added a chronic illness rider. Last year, she had a stroke and now needs help at home. This rider allowed her to access a significant portion of her policy’s death benefit while she is still living to pay for her home health aide. This turned her life insurance into living insurance. Without the rider, that money would have been locked away until she passed. These modern riders can add a powerful layer of protection for real-life events, making your policy much more than just a death benefit.
How Low Interest Rates Have Impacted Universal Life Performance
The Story of a Broken Promise for Many Policyholders
In the 90s, UL was sold as a product where you could “vanish” your premiums after 10 or 15 years because high interest earnings would take over. My old boss has one of these policies. He’s now 65 and is still paying premiums, 25 years later. The prolonged period of low interest rates meant his cash value never grew as projected. It couldn’t support the policy’s costs on its own. The low-rate environment of the past two decades has been the single biggest challenge for traditional UL policies, requiring owners to pay far more than they ever expected.
Is Universal Life Insurance Too Complicated for the Average Person?
It Depends on Your Financial Personality
I have two friends. One is a data analyst who loves spreadsheets. He got a UL policy and enjoys tracking the costs, returns, and funding levels. The flexibility and control appeal to him. My other friend is a yoga instructor who values simplicity. The moving parts of UL stressed her out, so she chose a fixed-premium whole life policy instead. Universal Life isn’t inherently “good” or “bad,” but it is complex. It’s best suited for people who are willing to be engaged and actively manage their policy, not for those who want to “set it and forget it.”
Using Universal Life in Estate Planning Strategies
A Flexible Tool for a Lasting Legacy
A wealthy family I know uses Universal Life inside an Irrevocable Life Insurance Trust (ILIT). They needed a permanent death benefit to pay future estate taxes. They chose UL over Whole Life because of its flexibility. In years when their business is booming, they can overfund the policy. If they have a tight year, they can pay a lower premium. This flexibility to adjust funding while maintaining a permanent death benefit makes UL a popular choice for complex, multi-generational estate plans where cash flow can be unpredictable.
Selling Your Universal Life Policy: What Are Your Options?
Turning an Underperforming Asset into Cash
My 75-year-old grandfather had a UL policy that was becoming a burden. The premiums were high, and the cash value was low. He was about to surrender it for the small $10,000 cash value. His advisor told him to look into a life settlement. A third-party company evaluated his health and offered him $30,000 in cash for the policy. They took over the premium payments and will collect the death benefit when he passes. For an older person with a policy that is no longer needed or affordable, a life settlement can be a far better option than just walking away.
What Happens If Your UL Cash Value Hits Zero?
The Point of No Return
Think of your UL policy’s cash value as the fuel in a gas tank. The cost of insurance is the fuel the engine burns each month. If your cash value hits zero, you’ve run out of fuel. The insurance company will typically give you a 30-60 day grace period to make a large premium payment to refuel the tank. If you don’t, the engine sputters and dies. The policy lapses, your coverage is gone forever, and all the premiums you paid over the years are lost. This is the ultimate risk of underfunding a UL policy.
Getting Universal Life Insurance with Health Conditions
Possible, But Funding Becomes Even More Critical
My friend with well-managed Type 2 diabetes was able to get a universal life policy. However, because of his condition, his internal Cost of Insurance (COI) charges were rated higher than a healthy person’s. This means his policy is “more expensive” on the inside. His advisor stressed that he must be diligent about paying the target premium, not the minimum. A higher COI means the policy’s cash value will deplete faster if underfunded. So, while you can often get coverage, you have to be even more disciplined about paying enough premium to overcome the higher internal costs.
Comparing Universal Life Quotes: Look Beyond the Premium
The Dangers of Comparing Apples to Oranges
When I was shopping for a UL policy, one illustration showed a premium of $100 a month, while another showed $120. The cheaper one seemed like the obvious choice. But my agent showed me the fine print. The cheaper quote was based on an aggressive, non-guaranteed interest rate of 6%. The more expensive one was based on a more conservative 4.5%. The cheaper policy was far more likely to require higher payments down the road. Never compare UL policies on premium alone. You must compare the interest rate assumptions, the guaranteed costs, and the company’s financial strength.
The Role of Universal Life in Business Succession Planning
A Flexible Way to Fund a Buy-Sell Agreement
Two partners in a growing tech startup used Universal Life to fund their buy-sell agreement. They need permanent insurance, but their company’s cash flow is unpredictable. They chose UL for its flexibility. In a year with high profits, they can funnel extra cash into the policies. If they have a tight quarter while investing in new servers, they can reduce the premium payments temporarily. This ability to adjust funding to match business cycles makes UL a practical tool to ensure a business can survive the death of a partner.
How Universal Life Insurance Loans Work
Similar to a Line of Credit, But with Caveats
Taking a loan from your UL policy is easy—it’s your money, after all. You’re using the cash value as collateral. But it’s crucial to understand the impact. The loan accrues interest. If you don’t pay it, the interest gets added to the loan balance. This growing loan can be a drag on your policy’s performance, especially if market interest rates are low. An unpaid loan reduces the death benefit and, in a worst-case scenario, can cause the policy to lapse if the loan balance grows too large. It’s a great feature, but it must be managed responsibly.
Understanding the Mortality & Expense (M&E) Fees in UL
The Fixed Costs of Running Your Policy
Besides the variable Cost of Insurance (COI), your UL policy also has Mortality & Expense (M&E) charges. Think of these as the fixed administrative fees the insurance company charges to run the business, issue the policy, and cover its overhead. It’s usually a small percentage of your cash value. While the COI is the big, scary cost that increases with age, the M&E is a smaller, more predictable fee. When you look at an illustration, you’ll see these charges broken out. They’re part of the total cost you need to overcome with premiums and interest.
Can You Convert a Term Policy to Universal Life?
Your Escape Hatch to Permanent Coverage
My friend bought a 20-year term policy when he was 30. At age 45, he was diagnosed with a chronic illness that would make him uninsurable. His term policy was set to expire in five years, leaving him with no coverage. Fortunately, his policy had a conversion privilege. He was able to convert his term policy into a Universal Life policy without any new medical questions. His premiums are higher, but he now has permanent coverage he otherwise couldn’t get. This rider is one of the most valuable, and often overlooked, features of a good term policy.
Universal Life for People Who Expect Income Fluctuations
The Ideal Policy for the Unpredictable Paycheck
My sister is a real estate agent. Some years she sells ten houses; some years she sells thirty. A rigid, fixed premium for life insurance would be stressful. Universal Life is perfect for her. In a great year, she pays a large lump sum into her policy, getting it way ahead of schedule. In a slow year, she pays just enough to keep it going. This ability to match her premium payments to her cash flow makes UL the ideal permanent insurance solution for anyone with a variable income, like salespeople, freelancers, or small business owners.
Is the Cash Value Growth in UL Taxable?
No, It’s Sheltered from Annual Taxes
One of the most powerful features of Universal Life is that the interest credited to your cash value grows tax-deferred. Imagine you had a savings account that earned $1,000 in interest this year; you’d get a 1099-INT form and owe taxes on that gain. With a UL policy, if your cash value grows by $1,000, there’s no tax due. This allows your money to compound more efficiently over time without the drag of annual taxation. This tax-deferred accumulation is a cornerstone benefit of all permanent life insurance.
What is the “Corridor” in a Universal Life Policy?
The IRS Rule That Keeps It “Life Insurance”
My agent showed me a chart where the death benefit had to stay a certain percentage above the cash value. He called this the “corridor.” It’s an IRS rule. To qualify for all the tax benefits of life insurance, a policy must have a minimum amount of “at-risk” insurance over and above the cash value. If your cash value grows too quickly and gets too close to the death benefit, the policy automatically increases the death benefit to maintain this corridor. It’s an automatic safeguard to ensure your policy doesn’t accidentally become a taxable investment.
Current Assumption Universal Life: How It Works
The Original, Interest-Sensitive UL
“Current Assumption” is the classic form of Universal Life. The name says it all. The policy’s performance is based on the insurance company’s current assumptions about interest rates and mortality costs. If the company’s investments do well and people live longer than expected, they might credit a higher interest rate and charge lower costs. If their investments do poorly, your interest credits will fall. This is the original, flexible but non-guaranteed UL that became popular in the 80s and got many people in trouble when interest rates fell. It requires active monitoring by the owner.
Protecting Your Universal Life Policy from Lapsing
Three Rules for UL Owners
I asked my advisor for the three golden rules to keep my UL policy healthy. He said: 1) Conduct an annual review. Look at the in-force illustration every year to see if it’s on track. 2) Pay the target premium, not the minimum. The minimum is a trap; consistently paying the planned premium is key. 3) Use loans wisely. If you borrow from the policy, have a plan to pay it back, as unpaid loans create a drag on performance. Following these three rules transforms UL from a risky product into a powerful and flexible financial tool.
The History of Universal Life: Why It Became Popular (and Controversial)
A Product Born in a High-Interest-Rate World
Universal Life was introduced in the late 1970s when interest rates were in the double digits. It was revolutionary. It offered market-like interest rates combined with the flexibility to change premiums—a huge contrast to rigid whole life policies. It sold like crazy. The controversy began when interest rates started their long, steady decline. Policies that were illustrated with 12% interest were suddenly only earning 4%. They became severely underfunded, and many people who thought their policies were secure found them in danger of lapsing. It’s a lesson in understanding the assumptions behind a financial product.
Universal Life Insurance for High Net Worth Individuals
A Key Tool in the Estate Planning Toolbox
For my wealthy clients, Universal Life is often a cornerstone of their estate plan. They use it to create a large, income-tax-free pool of money to pay estate taxes. This prevents their heirs from having to sell the family business or real estate portfolio to pay the tax bill. They choose UL for its premium flexibility, allowing them to make large, tax-efficient gifts into a trust to fund the policy. The focus isn’t on the cash value as a retirement tool, but on the death benefit as a source of tax-free liquidity for the next generation.
Can You Overfund a Universal Life Policy? (MEC Rules)
Yes, But It Changes the Tax Rules
A friend wanted to use his UL policy as a supercharged savings account and planned to put $50,000 into it in the first year. His advisor warned him about the MEC (Modified Endowment Contract) rule. If you fund a life insurance policy above certain IRS-defined limits, it is reclassified as a MEC. The death benefit remains tax-free, but any loans or withdrawals of cash value are taxed less favorably (gains come out first and may be subject to a penalty). You can overfund a policy, but you need to be careful to stay below the MEC limit to preserve all its tax advantages.
The Secondary Guarantee in GUL Policies: How Solid Is It?
As Solid as Your Discipline
The “secondary guarantee” is the no-lapse promise in a Guaranteed Universal Life (GUL) policy. How solid is it? It’s ironclad, with one huge condition: you must pay the specified premium on the scheduled date, without fail, for the life of the guarantee. If you are one day late or one dollar short on a single payment, you risk voiding that guarantee forever. The policy would then revert to its (very low) guaranteed interest rates and likely lapse quickly. The guarantee is a contract, and it requires your perfect performance to remain in force.
Universal Life vs. Other Permanent Policies: A Feature Comparison
Choosing Your Fighter: Flexibility vs. Guarantees vs. Growth
I explain permanent policies to my friends like this: Whole Life is the tank—slow, steady, with ironclad guarantees. Universal Life is the versatile rogue—it offers great flexibility but requires you to manage it carefully. Indexed Universal Life is the mage—it offers higher growth potential by linking to the market, with some built-in protection. Variable Universal Life is the glass cannon—you get direct market investment for the highest potential returns but also the risk of real losses. Which one is best depends on your appetite for risk, complexity, and guarantees.
Using UL to Pay Estate Taxes
The Liquidity Solution for an Illiquid Estate
An old farmer I know owns millions of dollars in land but has very little cash. He knows that when he dies, his children will face a massive estate tax bill. They would have to sell a portion of the family farm just to pay the taxes. To solve this, he set up a trust that owns a large Universal Life policy on him. When he passes, the policy pays a tax-free death benefit to the trust. His children can then use that cash to pay the estate taxes, allowing them to inherit the farm fully intact.
How is the Credited Interest Rate Determined in UL?
It Follows the Insurance Company’s Own Investments
The interest rate your UL policy earns isn’t tied directly to the stock market or a public index. It is declared by the insurance company, usually on an annual basis. It’s based on the performance of the company’s “general account,” which is a massive, conservative portfolio consisting mostly of high-quality, long-term corporate bonds, mortgages, and similar fixed-income investments. So, when general bond market interest rates are high, UL credited rates tend to be higher, and when they are low, UL rates will also be low.
Is Universal Life Insurance a Good Deal in Today’s Market?
It Depends Entirely on the Type of UL
Asking if Universal Life is a good deal is like asking if a car is a good deal. It depends on the model. Traditional “current assumption” UL is a tough sell in a low-interest-rate environment because its performance is so muted. However, Guaranteed Universal Life (GUL) is extremely popular right now. It acts like “term-for-life,” offering a guaranteed death benefit at a much lower cost than Whole Life. For people who want permanent coverage without the focus on cash value, a GUL can be an excellent deal in today’s market.
Explaining Universal Life Insurance Simply
The Bucket Analogy
I explain Universal Life as a simple bucket. You pour in flexible premiums (water in). Each month, the insurance company takes out the cost of insurance and fees (a small leak). They also add interest they are crediting (a small faucet pouring water in). Your cash value is the water level in the bucket. As long as you put enough water in to offset the leak, your policy stays alive. If you don’t, and the water level hits zero, the policy is empty and it lapses. Your job is to make sure the bucket never runs dry.
My Experience Managing a Universal Life Policy
A Lesson in Diligence
I bought a UL policy five years ago. For the first two years, I just paid the bill and filed the statements. Then I sat down with my advisor for a review. The in-force illustration showed that based on the current low interest rates, my policy was slightly underperforming the original projection. It wasn’t in danger, but it was a wake-up call. We decided to increase my monthly premium by $25 to put it back on a stronger footing. That experience taught me that UL isn’t a passive product; it’s a partnership where I have to do my part.
What Questions to Ask Before Buying Universal Life
Your Pre-Purchase Checklist
Before signing a UL application, I asked my agent four key questions: 1) Can you show me the illustration based only on the guaranteed minimum interest rate and maximum costs, so I can see the absolute worst-case scenario? 2) What is the target premium needed to sustain this policy to age 100, not just the lowball minimum premium? 3) What is the financial strength rating (e.g., from A.M. Best) of the insurance company? 4) What are the surrender charges, and how long do they last? Getting answers to these questions gave me a clear, realistic picture.
Universal Life Insurance Policy Audits: Why They’re Crucial
A Stress Test for Your Policy’s Health
My parents have had a UL policy since the ’90s. They assumed it was fine. I convinced them to get a third-party policy audit. The analysis was shocking: at its current funding level and with today’s low interest rates, the policy was projected to lapse at age 82. The audit gave them a clear “rescue plan,” showing how much extra premium was needed to make it last to age 100. An audit is like a medical stress test for your policy. It’s a crucial step, especially for older policies, to uncover problems while there’s still time to fix them.
Can You Reinstatement a Lapsed Universal Life Policy?
A Small Window of Opportunity
My coworker forgot to update his payment info after changing banks, and his UL policy lapsed. He panicked. I told him to call the company immediately. Most insurers offer a “reinstatement” period, often within a few months to a few years of the lapse. However, it’s not easy. He had to pay all the missed back-premiums with interest. More importantly, he had to provide evidence of insurability—basically, go through medical underwriting again. Since he was still healthy, he was able to get it reinstated. It’s a difficult and not-guaranteed process, so it’s best to never let it lapse.
The Impact of Policy Loans on UL Death Benefits
A Dollar-for-Dollar Reduction
It’s simple but crucial to remember: any outstanding loan on your universal life policy is paid back from the death benefit. If you have a $500,000 policy and an outstanding loan balance of $50,000 (including accrued interest) when you pass away, your beneficiaries will receive a check for $450,000, not $500,000. The insurance company pays itself back first. This is why it’s important to manage loans carefully and, if possible, pay them back, so your family receives the full amount you intended for them.
Universal Life: Flexibility That Requires Diligence
A Powerful Tool for the Responsible Owner
Universal Life is the sports car of the insurance world. It’s sleek, powerful, and offers incredible flexibility and performance in the right hands. You can adjust it to meet your exact needs. But just like a sports car, it requires regular maintenance and an attentive driver. If you neglect it—by underfunding it or not reviewing its performance—it can easily break down. UL is a fantastic tool, but its value is directly proportional to the diligence of its owner. It rewards attention and punishes neglect.