Review Your Universal Life Policy Expenses
Many people mistakenly believe that universal life and whole life insurance are essentially the same. The key difference is that whole life policies have fixed premiums that stay constant for your entire life. In contrast, universal life policies come with expenses that gradually increase as you age.
If these expenses exceed your premium (which can happen if you don’t make any withdrawals), the policy will begin to use your cash value to cover the difference. While cash value does earn interest over time, there’s a risk that rising expenses might outpace that growth.
If you opted for the minimum premium, your cash value may not have enough balance to generate significant interest. This can create a precarious situation where your expenses minus your premium eventually surpass the interest your cash value earns. As a result, your cash value may start to diminish, yielding even lower interest year after year, while your expenses continue to rise.
Before you know it, your cash value could be depleted, forcing you to drastically increase your premium to maintain your policy. Losing that cash value means you’ll have to adjust your payments upwards annually to keep up with growing expenses.
In short: Review the expenses on your latest statement. If they exceed the total of your premium and the interest on your cash value, consider increasing your premium now while you still have cash value available.
You’ve highlighted some important points about the differences between Universal Life and Whole Life insurance policies. It’s true that many people mistakenly think they function the same way. The increasing expenses associated with Universal Life can indeed lead to potential pitfalls if not monitored closely.
It’s crucial for policyholders to regularly review their statements and understand how their cash value and expenses interact. As you mentioned, if expenses outpace the premium and potential interest income, it can create a precarious situation where the cash value diminishes, leading to a need for significant premium increases later on to keep the policy active.
For individuals with Universal Life policies, being proactive about adjusting your premium can save a lot of stress down the line. Regularly checking in on your policy, understanding any changes, and consulting with a financial advisor can help maintain the balance needed to keep the policy healthy. Thanks for sharing this important reminder!