Problems with Underfunding a Universal Life Contract

In a universal life contract (UL) you begin by paying a planned premium. In subsequent years, UL allows the flexibility of paying very small, or very large premiums. However, if you pay too small a premium for an extended period, your contract might run low (or out) on cash value. If you have low cash value in later policy years, considerably higher premiums will be required at that time to keep the life insurance in force.

UL consumers are often misled by the fact they have built large cash values in their policies. Sometimes, customers feel completely secure when they see that the interest generated within their UL policy is higher than the cost of insurance inside the contract. This security is not always warranted, because the cost of insurance will increase as you age. If, at some point, the cost of insurance becomes sufficiently high, the contract could run out of cash value.

UL can represent an excellent life insurance purchase. However, existing UL contracts should be reprojected every five years at minimum. If interest rates have been falling, the level of premium might need to be increased. If a UL contract is underfunded (as above), the sooner the consumer moves to correct this situation, the better.

Re-entry Premiums
Preferred Underwriting
Universal Life and Universal Variable Life (more detail)
Retaining Tax Benefits of Life Insurance
Graded Premium Whole Life
Net Interest/Net Rate of Return

Copyright ©1996, The Jacobs Company, All Rights Reserved