Universal life insurance, while offering flexibility and potential for cash value growth, also comes with several potential drawbacks that individuals should consider before purchasing. Some of the possible drawbacks include complexity and potential for higher costs, investment risk, sensitivity to interest rates, potential for policy lapse, and impact on death benefit.
1. Complexity and potential for higher costs: Universal life insurance can be complex, and the potential for higher costs may arise if the policyholder does not manage the policy effectively. The cost structure of universal life insurance can be less transparent compared to term life insurance or whole life insurance, which may lead to unexpected expenses.
2. Investment risk: Universal life insurance policies often include an investment component, and the policyholder bears the investment risk. If the investments underperform, it can affect the cash value and potentially the coverage provided by the policy.
3. Sensitivity to interest rates: Universal life insurance policies are sensitive to changes in interest rates. If interest rates decrease, the policy's cash value growth may be lower than expected, potentially impacting the policy's performance.
4. Potential for policy lapse: If the policy's cash value is insufficient to cover the costs of insurance, the policy may lapse, leaving the policyholder without coverage. This risk is particularly relevant if the policyholder does not adequately manage the policy or if the policy's expenses increase unexpectedly.
5. Impact on death benefit: In some cases, policy loans or withdrawals can reduce the death benefit provided by the universal life insurance policy. It's important for policyholders to understand the potential impact of accessing the policy's cash value on the death benefit and overall coverage.
It's essential for individuals considering universal life insurance to carefully evaluate these potential drawbacks and assess whether the benefits of the policy align with their long-term financial goals and risk tolerance.