Why Is Universal Life Insurance Bad?

Posted by User Contributed

July 13, 2008

Universal life insurance is one type of life insurance coverage, and this type should be avoided by consumers because of the disadvantages this policy has. Life insurance coverage is needed by most people to take care of burial and funeral expenses, as well as cover any income that the insured usually contributes to the family and home expenses. Universal life may seem like a great deal because of the savings option, but look closely and you will see that this life insurance is not all it is advertised to be. The funds you use for this life insurance coverage could earn better interest rates in another investment option instead.

What Is a Universal Life Insurance Coverage?

Universal life insurance is coverage that includes a savings component. These policies are normally renewed yearly, and the life insurance rates include a combination of any applicable fees charged, the cost of the life insurance coverage, plus any other funds that you want to deposit for savings. This policy type deducts the costs of the life insurance premiums from the savings in the account, after the premiums you pay plus account interest is added to the savings. The account balance earns a rate of interest that is normally low, usually six percent or less.

The Disadvantages Of Universal Life Insurance

Universal life insurance policies have many drawbacks that make this life insurance coverage a bad deal for almost every individual. The premium due may increase over time as you age, growing much larger than the initial premium amount. The amount of interest paid is at a very low rate, and this can cost you substantial returns on your investment over the years. Many times whole life coverage would offer a much better interest rate than this life insurance coverage, making it a better deal. If you surrender your policy within the first fifteen years of coverage you may end up paying a substantial penalty to the life insurance company. Reading and understanding the annual statements are a must with this type of life insurance coverage.

Universal Life Insurance Is A Big Mistake

A Universal life insurance policy can be started with a minimum amount of funds invested, and this is part of the problem. This life insurance coverage is like a boat with a small hole. At first little effort is needed to stay afloat, and these policies can be started with the equivalent of five years premium costs usually, but the longer the boat is in the water the bigger the hole becomes, requiring more effort to stay afloat. With Universal life insurance, the more you age the higher your premiums will be each year, because these policies have an annual renewal term. This means more money required just to cover the life insurance rates each year, without any savings being done. The interest rate is also much lower than other investment options.

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