Universal life insurance costs more to keep than term, and the price can jump without warning

Universal life insurance (UL) has lower premiums than whole life in the early years, but that advantage disappears. The policy's cost structure means your premium can rise sharply after the first few years, sometimes doubling or tripling. Unlike term insurance, where your rate is locked in for 10, 20, or 30 years, UL premiums are not may provide — the insurance company can raise them if interest rates fall, if you live longer than expected, or if the company's costs increase.

The policy also charges you monthly for the cost of insurance, and that charge grows as you age. Early on, the cash value inside the policy earns enough to cover some of that cost. But if interest rates stay low or the policy's investments underperform, the cash value shrinks, and you end up paying the full monthly cost yourself. Many people who bought UL policies in the 1980s and 1990s — when interest rates were high — found their premiums tripling or quadrupling decades later.

This is not a theoretical problem. It happens regularly enough that financial advisors now warn clients about it. If you cannot afford the higher premium when it arrives, you either pay it or let the policy lapse and lose all the cash value you built up.

Key Takeaways

  • Universal life premiums are not locked in and can rise significantly after the first few years, sometimes doubling or tripling over the life of the policy.
  • The policy's cash value depends on interest rates and investment performance, and if either underperforms, you pay the shortfall out of pocket.
  • If you stop paying when premiums rise, the policy ends and you lose the cash value you accumulated, with no death benefit paid.
  • Universal life is more complex to monitor than term insurance, requiring you to track the cash value and adjust premiums to keep the policy in force.
  • The surrender charges and tax consequences of withdrawing cash value can be steep, making it expensive to exit the policy early.

The cash value can disappear if the policy underperforms

UL policies have a cash value component that grows tax-deferred. The insurance company credits interest to this account each month, and that interest is supposed to help pay the cost of insurance. But the interest rate is not may provide — it varies based on market conditions and the company's investment returns.

When interest rates are high, the cash value grows quickly and covers most or all of the monthly insurance cost. When rates are low, the growth slows. If the cash value does not grow fast enough to cover the monthly charge, you have to pay the difference yourself. Over time, if you do not pay enough, the cash value can shrink to zero. Once it does, the policy ends — you lose the death benefit and any remaining cash value.

This is different from whole life, where the premium is may provide and the policy will not lapse as long as you pay it. With UL, you are betting that the cash value will keep pace with the cost of insurance. If it does not, you lose.

Withdrawals and loans come with taxes and surrender charges

One reason people buy UL is to access the cash value if they need money. But that access is not free. If you withdraw cash from the policy, you pay income tax on any amount above what you paid in premiums. If you take a loan against the cash value, you pay interest on the loan, and if the loan is not repaid, it reduces the death benefit.

You also face surrender charges if you withdraw money in the early years. These charges can be 5 to 10 percent of the cash value, and they decline over time but may not disappear entirely. If you need the money quickly, the surrender charge can wipe out a significant portion of what you have built up.

The tax bill can also be a surprise. If your policy has grown substantially and you withdraw $20,000, you might owe income tax on $15,000 of that amount. That tax is due in the year you withdraw, which can push you into a higher tax bracket.

The policy is complex and requires active management

Term insurance is simple: you pay a premium, the company pays a death benefit if you die, and that is the end of it. UL requires you to monitor the cash value, track the interest rate being credited, and adjust your premium payments if the cash value is not keeping pace.

Many policyholders do not realize this until years later, when they receive a notice that their premium is about to jump or that the policy will lapse if they do not pay more. By then, they may not remember the details of the policy or understand what went wrong. Some people simply let the policy lapse rather than pay the higher premium, losing years of premiums they paid in.

If you want to keep the policy in force, you need to stay engaged with it. That means reviewing statements, understanding how the cash value is performing, and being prepared to pay more if interest rates fall or the policy underperforms.

UL is more expensive than term insurance over most time horizons

The initial appeal of UL is the lower premium compared to whole life. But compared to term insurance, UL is significantly more expensive. A 35-year-old in good health might pay $30 to $50 per month for a $500,000 term policy lasting 30 years. The same person might pay $150 to $250 per month for a comparable UL policy.

If you invest the difference — $100 to $200 per month — in a regular investment account, you will likely come out ahead. Over 30 years, that difference compounds. Even accounting for the tax-deferred growth inside the UL policy, most people would build more wealth by buying term and investing the difference themselves.

UL makes sense only if you expect to keep the policy for decades and you want the tax-deferred growth and the permanent death benefit. For most people, term insurance is cheaper and simpler.

Surrender charges lock you in if you change your mind

If you buy a UL policy and later decide you do not want it, you cannot simply walk away. The insurance company charges a surrender fee if you cancel the policy in the early years. These fees typically start at 5 to 10 percent of the cash value and decline by 1 percent per year until they reach zero, usually after 10 to 15 years.

This means if you cancel a $100,000 UL policy after five years and the surrender charge is 5 percent, you lose $5,000 of your cash value. That money goes to the insurance company, not to you. If you have paid $30,000 in premiums over those five years and the cash value is only $25,000, the surrender charge makes the situation worse.

You are locked in for years. If your financial situation changes or you realize UL was not the right choice, you still have to pay to exit.

Interest rate risk means you cannot predict your long-term cost

When you buy a term policy, you know exactly what you will pay for the entire term. When you buy a UL policy, you do not. Your cost depends on interest rates, which you cannot control. If rates fall and stay low for years, your premiums will rise and stay high. If rates rise, your premiums may stabilize or even fall.

This uncertainty makes it hard to budget. You might plan to pay $150 per month for 30 years, only to find that in year 10, the premium jumps to $300 per month. If you cannot afford it, you have to let the policy lapse.

Insurance companies do not may provide that interest rates will remain stable or that your cash value will grow at any particular rate. They only may provide the maximum cost of insurance — the amount you would pay if the cash value earned zero interest. That maximum is often much higher than the initial premium, which is why the policy can become unaffordable.

Frequently Asked Questions

Can a universal life insurance policy lapse if I stop paying?

Yes. If your cash value does not cover the monthly cost of insurance and you do not pay the difference, the policy will lapse. Once it lapses, the death benefit ends and you lose any remaining cash value. You cannot reinstate it without reapplying and passing underwriting again.

What happens to my cash value if I surrender the policy?

You receive the cash value minus the surrender charge. If you surrender in the early years, the charge can be 5 to 10 percent or more. You also owe income tax on any gain above what you paid in premiums. If the cash value is less than your total premiums, you may get back less than you put in.

Is universal life insurance ever a good choice?

UL can make sense if you want permanent coverage, expect to keep the policy for 20+ years, and can afford the premiums even if they rise. It is also useful if you have a large estate and want tax-deferred growth. For most people, term insurance is simpler and cheaper.

How much can my universal life premium increase?

There is no legal limit. The insurance company can raise your premium as much as needed to keep the policy in force, though it cannot exceed the maximum cost of insurance stated in your policy. In practice, premiums can double or triple over 20 to 30 years if interest rates fall or the policy underperforms.

Should I convert my universal life policy to term insurance?

If your UL premiums have risen and you cannot afford them, converting to term may not be an option — most policies allow conversion only within a certain window. Surrendering the policy and buying term separately is usually possible, but you will owe taxes on any gain and pay a surrender charge. Talk to a tax professional before making the move.