With Universal life, the number and amount of premium payments can vary within predetermined limits. If the policy’s cash value is high enough, the policy owner can technically avoid paying premiums. However, if the policy owner uses cash value to pay off premiums, those premium payments are treated as loans under the policy, which will be taxed at some point.
On the other hand, if this policy’s cash value falls below a termination threshold, the future payments needed to keep the policy in force can become impracticable to maintain. Moreover, there is no renewal under this policy so, if it terminates and the insured still wants insurance, the insured faces the risk of whether they are still insurable or will have to pay higher premiums because the insured is older. Thus, it is important to pay premiums and meet cash value requirements when purchasing Universal Life Insurance.
Some cool features of this type of policy (as a tradeoff for the increased risk) is that cash values can increase at a higher rate, and the insured can also withdraw money from the policy’s cash value as opposed to just taking a loan against it.
NOTE: Secondary Guaranteed variation of Universal Life shifts the investment risk of universal life insurance to the insurance company by guaranteeing the death benefit and fixing premium costs. Thus, the policy owner is protected from the carrier’s investment risk and increased charges.
