The Dangers of Universal Life Policies: Protect Yourself and Your Family

Know the dangers of universal life policies so you can make informed decisions about the best products for your family.
Don’t Fall Prey to Marketing That Only Shows the Upside


As trusted Registered Investment Advisors with more than 34 years in business, the team at Davidson Capital Management considers it a top priority to provide information our clients and readers can trust. In the pursuit of this goal, it’s important to shed light on certain financial products that, while marketed as advantageous, may not always serve your best interests. You know we never pull any punches, and today we’re talking about a life insurance product that often raises concerns, but which is heavily marketed to consumers. Read on as we lay out the dangers of universal life policies and why you should think twice before getting one.

What Is Universal Life Insurance?

Before we can talk about the dangers of universal life policies, let’s make sure we’re all on the same page about what this type of insurance policy is.

Universal Life Insurance, commonly known as UL in the insurance business, is a type of permanent life insurance. Unlike term life insurance, which provides coverage for a specific term, permanent life insurance is designed to last a lifetime, provided premiums are paid.

UL insurance combines a death benefit with what essentially amounts to a savings component. A portion of the premium payments goes towards the cost of insurance, while the remainder is invested and accumulates cash value over time. The idea is that the cash value can potentially grow and be used to cover future premiums or even be withdrawn by the policyholder.

While it may sound appealing on the surface, this article is about the dangers of universal life policies for the simple reason that they come with significant drawbacks and potential dangers that you should be aware of.

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Here are a few:

1.     Complex and Hidden Fees

Universal Life policies are notorious for their complexity, especially when it comes to fees and charges. Policyholders often find themselves facing a maze of fees, including mortality and expense charges, administration fees, and cost of insurance charges. These fees can eat into the cash value of the policy, reducing its effectiveness as an investment vehicle, and that’s why this tops our list of the dangers of universal life policies you should be aware of.

2. Variable Premiums

One of the key selling points of Universal Life policies is “flexibility” in premium payments. While this flexibility may sound attractive, it can also be a double-edged sword. If your investment returns within the policy don’t meet expectations, you may need to pay significantly higher premiums to keep the policy in force, which can strain your finances. In short, one of the dangers of universal life policies is that they can cause financial stress rather than provide peace of mind.

3. Interest Rate Risk

The cash value component of a Universal Life policy is often tied to interest rates. If interest rates decline, your cash value may not grow as anticipated, potentially leaving you with insufficient funds to cover future premiums or policy costs.

4. Lapse Risk

Another of the dangers of universal life policies that pose a significant concern is the risk of policy lapses. If the cash value is insufficient to cover the costs and fees, the policy may lapse, leaving you without coverage and losing the money you’ve invested in premiums – truly a worst-case scenario, right?

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5. Better Alternatives

This may not count strictly as one of the dangers of universal life policies, but it’s necessary to point out that there are better options. Rather than relying on Universal Life policies, there are more straightforward and cost-effective ways to secure your family’s financial future. Term life insurance, already mentioned above, can provide high coverage at a fraction of the cost of Universal Life policies. Additionally, building a diversified investment portfolio and utilizing tax-advantaged retirement accounts can offer better returns and, importantly, more control over your financial future.

We believe life insurance is important especially if you have a young family but as you get older the need for life insurance becomes less important. We always warn consumers if an insurance agent pitches you the idea of life insurance with an investment aspect be very careful. Life insurance is simply that, insurance against your life just like car insurance insures your car. But you’ve never heard of car insurance sold with an investment aspect attached. So why do some life insurance products offer investment aspects? In our opinion, it comes down to making larger sales commissions.

Were You Aware of These Dangers of Universal Life Policies?

It is endlessly frustrating to us that certain risky financial products are marketed as financial security solutions for anyone and everyone. (We’re talking about the dangers of universal life policies here, of course, but don’t even get us started on Equity Index Annuities!) Far too many people don’t see the full picture of these products.

The truth is that Universal Life Insurance policies may not be the best choice for those seeking long-term financial security. The complexity, hidden fees, and inherent risks associated with these policies are all dangers of universal life policies that can outweigh the potential benefits. As a trusted Registered Investment Advisor and fiduciary, the Davidson Capital Management team encourages you to explore alternative options that can offer more transparent and cost-effective solutions to protect your family’s well-being.

Before making any decisions regarding your life insurance and investment choices, I recommend consulting with a Registered Investment Advisor who can help you navigate the complex world of insurance and investments, ensuring that you understand any risks and that you are prepared to make informed choices tailored to your unique financial goals and circumstances.

Your financial security is of paramount importance, and it’s crucial to be well-informed and cautious when considering financial products such as Universal Life Insurance policies. If you’d like to learn more about the dangers of universal life policies or discuss better options for your future financial security, please reach out to schedule a conversation.