Life Insurance Deep Dive:   The Hidden Risk of Universal Life

Universal life insurance (UL) is often marketed as a flexible and cost-effective alternative to whole life insurance. It builds cash value, provides death benefit protection, and in many cases, offers a minimum guaranteed interest rate, often around 4%. For certain policyholders, it can be a valuable tool, particularly because it allows for flexible premium payments.

However, many insurance agents fail to explain a critical component of these policies—the reason why universal life appears cheaper than traditional whole life insurance. The key lies in something called the mortality and expense charge (M&E)—and it has significant long-term implications.  While modern Universal Life Policies have addressed this issue, the policy that you purchased many years ago may be in jeopardy of running out of gas. 

Understanding Mortality & Expense (M&E) Charges

The M&E charge is the cost the insurance company deducts to cover the risk of paying out the death benefit. Unlike whole life insurance, where the cost of insurance is averaged over a lifetime (even assuming the insured lives to age 100), universal life policies do not lock in a fixed cost.

Instead, M&E charges are low in the early years, making universal life seem more affordable than whole life at first. However, this cost increases every year as the policyholder ages.

What starts as an attractive, low-cost alternative can quickly become financially unsustainable.

The Long-Term Cost Spiral: Why Universal Life Policies Fail

As the insured gets older, the rising M&E charges begin to erode the financial stability of the policy.

Over time:

• A growing portion of premium payments goes toward covering the increasing cost of insurance.
• Less money is allocated toward cash value accumulation.
• Eventually, the cost to maintain the policy exceeds the planned premium payments.

When this happens, the cash value that was initially accumulating begins to decline rapidly because the insurance company is using the cash in the policy to fund the M&E charges. If the policyholder does not review in-force illustrations regularly, they may be unaware that their policy is on track to lapse.

The “Running Out of Gas” Problem

Agents often describe this issue as a policy “running out of gas.†Once the cash value is depleted, the insurance company will issue a lapse notice, stating:

• The policy is about to terminate unless higher premiums are paid.
• Required premium payments increase dramatically to keep the coverage in force.
• If the insured cannot afford the new payments, the policy lapses—leaving them uninsured and with no cash.

This often happens when policyholders reach their 50s or 60s, at which point buying a new policy may be too expensive—or no longer possible due to health issues.

What You Need to Do Now

If you own a universal life policy, take action immediately:

• Request an in-force illustration from your insurance company to understand:
  • How much cash value remains.
  • Evaluate the trend in the cash value account
  • Anticipated lapse date at the current premium payment schedule.
• Review your policy’s guaranteed interest rate—and understand what it actually means.

The Misconception About the 4% Guarantee

Many policyholders believe that a guaranteed 4% return on their universal life policy means their cash value will grow by 4% annually. This is misleading.

• The 4% applies before expenses—not after.
• M&E charges and administrative fees are deducted from the account first, reducing the actual net return.
• In later years, the rising cost of insurance can completely negate any cash value growth, leading to policy failure.

The Bottom Line: Understand What You Own

Universal life insurance is not inherently bad, but it must be actively managed. Too many policyholders mistakenly believe they have a guaranteed death benefit for life, only to discover too late that their policy is set to lapse.

• Get an in-force illustration.
• Review your policy regularly.
• Understand how rising costs impact your coverage.

Ignoring these factors could leave you uninsured when you need coverage most. What you don’t know about your policy can cost you everything.