Negative Ramifications

Universal life insurance policies have flexible premiums. Because of the ability to reduce premiums, many consumers reduce their premiums to levels that are imprudent. In a universal life insurance policy, this can lead to the cash values of the policy dropping - sometimes even to zero! This can cause the insurance to lapse or to be prohibitively expensive.

This occurrence is caused by the Cost of Insurance (COI) increasing as the consumer ages. If the universal life contract is under funded (too few premiums), there will not be enough interest on the cash values to defray the increased COI. Furthermore, a well funded universal life contract will require less COI on a long-term basis because of increasing cash values.

If premiums are insufficient on a long term basis and the cash value falls to zero, the consumer is faced with the prospect of paying gigantic insurance premiums based upon current age. Lets say that you bought a universal life contract at age 30 and because of insufficient premiums, the policy cash value crashed to zero at age 90. The cost of the insurance at age 90 would probably be unaffordable. If a consumer cannot afford the high premiums at this point the coverage will lapse!

How does a consumer make sure that their existing universal life contract is adequately funded?

Every few years the consumer should request an inforce illustration from their agent. This should be reviewed to make sure that cash value growth will continue at existing premium levels. If the policy cash values start dropping at older ages in the inforce illustration, more premium should be put into the policy and the illustration should be redone to show the higher premium.