- The flexibility with respect to premium payments and death benefits permits policyowners to change the policy in such a way that it may inadvertently become a modified endowment contract (MEC) with adverse tax consequences.
- Although traditional participating whole life policies are indirectly "interest-sensitive", mortality and expense charges are guaranteed. In a universal life policy, the policyowner bear more of the risk of adverse trends in mortality or expenses than if they owned traditional whole life policies.
- Some universal life insurance policies, similar to many traditional whole life policies, use what is called the direct recognition method to determine the amounts credited to cash values that are subject to policy loans. Under such method, only the portion of cash value that is not used to secure a loan is credited with the current rate.
- Some newer and most older policies use a two-tiered interest crediting approach that credits interest on the first $1,000 or so of cash value at the minimum rate guaranteed in the contract.
- Surrender of the policy within the first 10 years may result in considerable loss, because of surrender charges.
In our last blog post, we discussed the advantages of universal life policies. Now the disadvantages of universal life policies -
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