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What is UL insurance — and how could this happen?

A UL insurance policy is a type of permanent life insurance that contains two parts: a death benefit — the lump sum your beneficiary receives — and cash value, which is a built-in savings and investing feature.

Depending on which type of universal plan you choose, you may be charged a fixed or an adjustable premium. Your premium will cover two things: the cost of insurance (COI) amount and cash value.

Premiums first cover the COI, which is the minimum you must pay to get coverage. Anything on top of that goes toward the cash value and is invested so it can grow. Note that some UL policies charge investment fees.

The premiums of a UL policy are flexible. They may start lower but increase as you age. If you do not keep up with your premiums, the policy can eat into your cash value — potentially impacting your death benefit or causing your policy to lapse.

This appears to be what happened to the 72-year-old woman. Tanya says she told her: “I understand you’ve had that policy since 1987. You’ve done nothing wrong, you’ve paid your premiums on time, every month, faithfully.

“However, the policy is running out of cash value because you’ve been paying the same premium every year since 1987. You haven’t increased it, you haven’t put any more money into your cash value. Therefore, there’s not enough money to offset the cost of insurance, so now your policy’s about to end.”

When Tanya delivered the final sucker punch — that the elderly woman’s cash surrender amount had shrunk to just $70 because it was used to offset the cost of insurance — she says the woman hung up the phone.

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UL insurance: A 'quack scheme'?

These types of issues with UL insurance policies are “very common,” according to Tanya.

“We get calls like this all the time, where a 72-year-old person, 80-year-old person, even a 60-year-old person who’s had their policy for more than 15 years thinks that just paying the premiums on time every month is going to keep the policy, and it does not,” she said.

The comments on Tanya’s video are overwhelmingly in support of the elderly woman, with many sharing similar stories of elderly relatives who suffered the same fate. One user wrote: “My dad had one of those. When he passed we got a check for $19.23”

Others called out the insurance companies and agents selling UL insurance for not educating consumers or properly explaining how these policies work. One commenter said that’s why they left their insurance job, stating: “It made me too sad.”

“How is this legal?” one user asked.

It’s not just TikTok users slamming UL insurance. It also has a bad reputation among personal finance aficionados.

In a video interview with Moneywise, Tori Dunlap, founder of the financial education platform Her First $100K, dubbed indexed UL insurance as a “scam” — especially if people buy it as an investment.

Likewise, money coach Ramit Sethi slammed indexed UL insurance as a “quack scheme” that completely misses the point of “low cost, simple, long-term investing.”

Alternatives to UL: Are they better?

Instead of buying a UL insurance policy, Tanya suggests looking into whole life insurance or term life insurance.

Whole life insurance is a permanent life insurance policy with a fixed premium, death benefit and a fixed interest rate for cash value growth. This type of policy is more predictable than UL insurance, but it is also less flexible (you can’t typically alter your premiums or your death benefit amount as your needs change) and often far more expensive than other types of life insurance.

Term life insurance is valid for a specific period of time and guarantees payment if a person dies within that term. It’s typically the cheapest form of life insurance because it only offers a death benefit for a restricted time and it doesn’t have a cash value component. You don’t get any money back if your policy term expires and you’re still alive.

Keep in mind that these alternative life insurance products still aren’t overly popular. Dave Ramsey has said he “hates” whole life insurance on “The Ramsey Show” because of the management fees, the “absolutely horrendous” returns and the fact that insurers absorb much of the cash value of your policy when you die.

Life insurance has long been a divisive financial product. Many people think you would be better off saving or investing your money in tax-advantaged retirement accounts, like a 401(k) or an individual retirement account (IRA), and then leaving that money to your beneficiaries in your will.

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Life insurance policies in decline

Despite a small uptick last year, it seems fewer Americans are buying life insurance.

Just over half, 52%, of Americans reported owning life insurance in 2023, according to Forbes Advisor, citing data from insurance research firm LIMRA. That's a couple of percentage points higher than the previous year, but down 11 points from 2011.

The percentage of Americans particularly with cash-value life insurance policies — which may include UL or whole life insurance — dropped to 20% in 2019 from 30% in 1998, reports Forbes Advisor.

Among the reasons Americans have not purchased life insurance, 42% say it’s too expensive, 28% have other financial priorities and 23% are unsure if they need it. Interestingly, 82% of consumers believe the cost of life insurance is three times the actual price.

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Bethan Moorcraft is a reporter for Moneywise with experience in news editing and business reporting across international markets.

Disclaimer

The content provided on Moneywise is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter.