What Are the Fees and Risks in Universal Life Insurance?
Understanding what you pay, how it affects your policy’s health, and the common pitfalls to avoid
Universal life insurance is often praised for its flexibility, long-term tax advantages, and ability to combine protection with investment growth. But behind that flexibility are a set of fees and potential risks that can affect how well your policy performs — or whether it survives at all.
These factors are not always clear at the time of purchase. Knowing what to expect, and how to manage your policy actively, can help you avoid surprises and build a more resilient insurance strategy.
What Types of Fees Are Built Into Universal Life?
Universal life insurance is not just a monthly premium. Several internal fees are deducted from your policy’s cash value, which can reduce performance over time or increase the risk of lapse.
| Fee Type | What It Covers |
|---|---|
| Cost of Insurance (COI) | Covers your actual life insurance coverage, based on age and risk |
| Administrative Fees | Pays for recordkeeping and management of the policy |
| Investment Management Fees | Charged if you choose market-based or index-linked options |
| Surrender Charges | Applied if you cancel or withdraw large amounts early |
| Premium Load Fees | A percentage deducted from each premium before it is invested |
These charges vary by insurer, policy structure, and funding level. While they may seem small, they compound over time and can eat into your policy’s growth if not offset by strong performance or sufficient funding.
Tip: Ask for a detailed cost breakdown when reviewing policy illustrations. Understanding where each dollar goes helps you compare policies more accurately.
The Risks You Need to Watch For
Unlike whole life insurance, which has fixed costs and guarantees, universal life exposes you to several risks that must be managed carefully.
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Underfunding the policy: Paying only the minimum premium might keep the policy active temporarily, but it can drain the cash value and lead to a future lapse.
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Poor investment returns: If your cash value is tied to market performance and the returns are low, your policy may not grow fast enough to cover future charges.
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Rising insurance costs: As you age, the cost of insurance increases. In later years, these charges can rise sharply, especially if cash value is low.
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Policy lapse: If charges exceed what is available in the policy account and no top-up is made, the policy will terminate without payout.
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Tax consequences: Withdrawals, loans, or lapses that exceed your adjusted cost basis may be taxed, even if the policy does not pay a death benefit.
When Risk Becomes a Real Concern
For example, someone in their 60s who purchased a universal life policy in their 40s may now face increasing costs of insurance. If their cash value has not grown as expected due to poor investment returns or low funding, the policy may begin to erode. Without intervention — such as increased payments or reducing the death benefit — the policy could lapse just when it is needed most.
Note: The earlier you identify shortfalls, the more manageable the solution. Regular policy reviews help you stay ahead of cost increases and avoid large one-time corrections.
How to Manage These Risks Proactively
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Fund toward the target or maximum: Building strong cash value early gives you more room later.
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Review annually: Check your policy performance, cost increases, and investment results.
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Work with an advisor: Policy optimization is not set-it-and-forget-it. Small changes can make a big difference over time.
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Adjust as needed: Reduce the death benefit, modify investment allocations, or top up the policy to extend longevity.
Universal life insurance works best when treated as a dynamic asset — one that evolves as your life and financial goals change.
Fees and Flexibility Go Hand in Hand
The same features that make universal life attractive, including investment potential, premium flexibility, and permanent coverage, also introduce moving parts that require attention. Understanding the fees and risks gives you the clarity to use the policy strategically rather than reactively.