According to  Forbes Report, at least three in four American adults are in some form of life insurance. However, among various insurance types, universal life insurance stands out for its flexibility and potential for cash value growth. 

Yet, like every financial decision, opting for universal life insurance requires careful consideration. Therefore, this article explores the advantages and challenges of universal life insurance to help readers make informed decisions. 

Let’s get started.

What Is Universal Life Insurance?

Universal Life (UL) Insurance is a type of permanent life insurance that allows policyholders to adjust their premium payment amounts within specific parameters. Like other permanent life insurance, Universal life insurance offers a cash value feature and lifetime coverage, provided premiums are paid. Unlike whole life insurance, universal life offers higher flexibility, enabling you to raise or lower your premiums within specific parameters. 

What Are the Advantages of Universal Life Insurance?

Besides offering lifetime coverage, universal life insurance offers numerous benefits for policyholders. These include: 

1. Premium Flexibility

Universal Life Insurance allows users to raise or lower their premium payments following specific parameters. Policyholders can pay more than the stipulated premium within a certain period to build cash value faster. Depending on their financial condition, they can also spend less, provided there is adequate cash value to cover insurance costs. 

1. Withdraw or Borrow Money 

Paying for a universal insurance policy means a part of the money goes towards covering death benefits, while the rest is allocated towards cash value. Cash value grows as the premium is paid, offering policyholders the option to withdraw some money or borrow against it. 

However, withdrawals or borrowings may attract tax implications. In addition, withdrawing or borrowing too much may reduce death benefits or cancel a user’s coverage. Therefore, it is vital to understand the insurance policy regulations before withdrawing or borrowing money from the cash value. 

1. Cash Value Growth 

Universal life insurance grows based on an interest rate linked to the performance index or other market factors. Unlike traditional whole life insurance, where the interest rate is fixed and determined by the insurance company, universal life insurance offers a variable interest rate. 

This means interest rates can change over time based on the performance of the financial index or other market factors. Variable interest rates have higher growth opportunities for cash value. Therefore, if the financial index or market performs well, the cash value will grow faster, increasing savings and profits.

In addition, insurance companies protect policyholders from adverse market conditions by offering a minimum guaranteed interest rate. Hence, if the chosen market underperforms, the cash value will continue to grow at the minimum guaranteed rate. As a result, it provides some stability for policyholders by ensuring growth in cash value regardless of market fluctuations. 

1. Cash Value Accessibility 

Universal life insurance makes cash-value loans accessible to policyholders through two main methods. They include: 

1. Policy Loans: Policy loans are similar to policyholders borrowing money from their savings accounts but using their policy’s cash value as collateral. The advantage of doing this is that it does not require a credit check or loan approval process.  Policyholders can also use the loan amount for unexpected expenses or financial emergencies.
2. Partial Withdrawals: Policyholders can withdraw partially from their policies' cash value. Unlike policy loans, partial withdrawals do not require a refund.

However, accessing cash-value loans requires adequate consideration and evaluation of your insurance company policies. For instance, outstanding policy loans and unpaid withdrawals decrease death benefits when a policyholder passes away.

Cash value may also deplete over time, leading to policy lapse if a policyholder consistently withdraws or takes policy loans without repayment. 

Universal Life Insurance Challenges 

Although acquiring Universal life insurance offers premium flexibility, cash value growth, and the opportunity to lend and borrow money, it comes with some challenges. These include: 

1. Premium Payments 

Universal Life insurance enables flexibility in premium payments. Yet, it has downsides. First, the policy may become underfunded if a policyholder does not pay the cash value, leaving the policyholder with a series of large payments to maintain.

In addition, if a policyholder consistently pays only the minimum premium, the cash value may not grow enough to sustain the policy long-term. Insufficient funding may also lead to higher premium requirements or policy lapses. 

1. Interest Rate Risks 

The cash value growth is linked to an interest rate that varies based on market performance. If the interest rate decreases significantly, it could impact the cash value growth, making it challenging to maintain the policy or achieve expected returns. 

The interest rate used by the cash value is influenced by how the financial index or market performs. Therefore, if the market performs well and the financial index sees positive returns, the interest rate attached to the cash value will increase, leading to faster cash value growth. 

However, if the financial index or market experiences negative returns or decreases significantly, the interest rate applied to the cash value will decrease, resulting in slower growth. Hence, managing this risk requires policyholders to understand the interest rate provisions of their specific universal life insurance policy. 

1. Insurance Costs 

The cost of an insurance policy may increase as policyholders age due to the expenses associated with providing life insurance coverage. Although the policy’s cash value may offset these costs, sustaining the increasing financial charges may be challenging. 

For instance, if the cash value growth is lower than anticipated, it may be insufficient to cover the rising cost of insurance charges. This may impact the policy negatively as more premiums will be required to maintain the death benefit, leaving less money to contribute to the cash value.

The solution to this is a regular policy review. Periodically reviewing universal life insurance policy with a financial advisor to check its performance makes it easier to know if the cash flow is lower than expected for necessary adjustments. 

Final Thoughts 

Ultimately, universal life insurance is valuable for those seeking lifelong coverage and potential cash value growth. By evaluating its benefits and challenges, policyholders can align the policy with their financial goals and decide if it is right for them. 

In addition, working with expert financial advisors will provide further guidance to help policyholders maximize life insurance benefits and navigate its challenges successfully.