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Universal life insurance is a type of permanent life insurance that—in theory—helps you protect your family and skip insurance premiums once in a while. Sounds like a win-win . . . but hang on! You should know the facts before you sign up.

Let’s uncover what insurance companies don’t want you to know about universal life insurance.

Universal life insurance adds a few twists and turns on your standard whole life policy (kind of like an M. Night Shyamalan movie but way less gripping and way more insurance-y).

Here’s how it works: You pay into the policy’s savings account whenever you pay your premium (the monthly fee that keeps your policy active). If you’ve built up enough cash value, you’re free to take some money out—similar to a bank account. But it’s not as easy as you might think. I’ll explain why in a few minutes.

Your monthly fee gets split into two parts: One part pays for life insurance coverage, and the other part goes into a savings and investment account (aka the cash value).

What sets this type of life insurance apart from other kinds of permanent life insurance is that it’s meant to be flexible—you can choose to pay less or more on your premium as long as your cash value doesn’t dip below a certain level.

So, the minimum premium payment covers your death benefit and administrative fees. Anything you pay over that is added to your cash value, which is guaranteed to grow according to a minimum annual interest rate set by the insurance company. And that’s where the surplus money comes from to cover your premiums if you decide to pay less some months.

It often works like this:

People choose to pay the maximum premium possible (which is set by the IRS) in the early years so they build a larger cash value. Then they use that cash to cover premiums later in life, when the cost of insurance gets more and more expensive. This means the cash value ends up shrinking in the back half of your life.

Now, there are some things that only get better as they shrink, like credit card debt, student loan payments, and a zit in the middle of your forehead on your wedding day. But cash value isn’t one of them.

Compare Term Life Insurance Quotes 

And the big question is this: when you get older, will you have enough cash value to cover the rising premiums? If you don’t, your policy will lapse (unless you chuck even more money in!).

Cost Factors of Universal Life Insurance

Like I explained above, there are two main cost factors to a universal life premium: the cost of the insurance and the savings component. But those are made up of a bunch of smaller cost factors—mainly fees. These fees eat up your premium, meaning very little actually goes to your investment portion. So it grows very slowly—the way your middle school guitar skills did because you only invested 10 minutes a week to practice them.

Advantages and Disadvantages of Universal Life Insurance

As much as I’m opposed to you buying a universal life insurance policy, it would be wrong to say there are zero benefits. In the table below, I share the incredibly short list of the advantages of universal life insurance and the much longer list of drawbacks.

Even though some people think of the cons listed above as advantages, the truth is, universal life insurance is one of the worst types of life insurance you can buy.

What Are the Types of Universal Life Insurance?

There are actually three main types of universal life to choose from. And that’s three too many, in my opinion.

Indexed Universal Life

For anyone with an indexed universal life insurance plan (IUL), their cash value is linked to an index like the S&P 500, the Dow Jones Industrial Average, or Nasdaq. So, if the market is doing well, the cash value will go up.

But there’s a catch—the rate of return on an IUL will always be lower than the performance of the index it’s tied to because the insurance company takes its hefty share in fees. And if the market is not doing well—you guessed it—the value of your plan will be even lower.

Guaranteed Universal Life

With guaranteed universal life policies, your premiums stay the same because the interest rates are set from the very beginning of the policy. As long as you pay your premium, you’ll have coverage for the rest of your life. This is the least risky universal life insurance policy, but since your premiums don’t adjust based on market performance, it hardly builds any cash value.

Variable Universal Life

Variable universal life insurance lets you invest your cash value into a sub account (like a mutual fund), which is a pool of money managed by a team of investment pros. Your cash value makes up part of that pool, and it’s invested into lots of different companies at once.

Again, the problem is this: Life insurance is meant to support your loved ones if you die—it’s not supposed to be an investment. And all that investing ain’t cheap. Insurance companies charge huge fees that’ll take a major bite out of your earnings.

How Does Universal Life Insurance Compare to Other Types?

I’m clearly not a big fan of universal life insurance as a product, but when you compare it with other offerings in the life insurance space, the problems become more glaring. Take a look.

Universal vs. Term Life Insurance

Unlike universal life, term life insurance only lasts for a set number of years. I recommend a term of 15–20 years. And it’s just life insurance—nothing more, nothing less. Without that cash-value dead weight, the premiums are much, much cheaper. We love to see it.

So, if you were to take the money you’d save by getting term life insurance instead of universal and invest it in mutual funds for 20 years, you’d end up with a whole lot more money than if you bought universal life insurance! And all of that money would go into your pocket—not to the insurance company.

Plus, you won’t need universal’s lifetime coverage if you start investing because you’ll eventually become self-insured.

Wait. What does self-insured mean?

Just this: If you invest 15% of your household income for the next 20 years, by the time your term life plan comes to an end, you won’t even need that death benefit. You’ll have built enough wealth on your own to be self-insured and provide for your family without life insurance.

That’s why you should never treat your life insurance as an investment. Life insurance has one job—to replace your income and provide for your family if you die. Always keep your investments separate from your life insurance.

How Much Does Universal Life Insurance Cost?

The cost of universal life insurance depends on your age, gender, habits and overall health. But one thing’s for sure regardless of any of those things: You’ll get a cheaper—and better—deal with term life insurance.

The fees you’ll pay for a cash value universal life insurance policy are huge. There are fees to have the insurance in the first place, fees to cover commissions, and fees to cover expenses for the insurance company. And the thing is, because of those crazy-high fees, you’ll build zero cash value in the first few years.

Trust me: The insurance company will make more off of a universal life insurance policy than you will.

Get Expert Help to Choose the Right Life Insurance

To really understand universal life (or any kind of life insurance), there’s one key thing to keep in mind: Life insurance isn’t supposed to be permanent. It also shouldn’t be an investment. So don’t overcomplicate it with a permanent policy. Keep it simple with term life and invest the money you save somewhere smart. By investing outside of your insurance, you can control how and where you use your money.

Listen, I know this insurance concept can seem like a complicated scam. And there are some legitimately confusing schemes out there masquerading as brilliant financial strategies. But getting the right coverage is a big deal.

If you’re wondering about the next right step to get covered, I’ve got some ideas for you here.

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