Universal life (UL) insurance provides lifelong coverage and lets policyholders accumulate cash value. These features make it suitable for those looking to combine long-term protection with potential savings growth and leave a legacy to their beneficiaries, regardless of where they live. For expats, UL insurance can also offer flexibility across borders, but it brings additional considerations such as currency exposure, jurisdictional tax rules, and policy portability.
However, before purchasing a policy, you should consider the potential issues you may encounter when funding and managing UL insurance.
In this guide, we’ll provide details on the common disadvantages of universal life insurance. We’ll also cover the main policy costs to help you determine if buying UL insurance fits your cross-border financial objectives and explain under what circumstances a UL policy can be an effective part of an international financial plan.
What You Will Learn
- What are the cons of universal life insurance?
- What is the average cost of universal life insurance?
- Should you keep your universal life insurance policy if you’ve purchased it?
- Is investing in a universal life insurance policy a good idea?
- How expats can mitigate the common drawbacks of UL insurance.
What Are the Main Problems With Universal Life Insurance?
When you purchase a traditional UL insurance policy, you keep it active by paying regular premiums. Once you pay administrative fees and the minimum cost of insurance (COI), which covers your death benefit, the rest of the funds go toward the cash value and may grow based on a fixed rate declared by the insurer or, for indexed/variable versions, according to market-linked performance within defined caps and floors. Index dividends are typically not credited.
This is a complex process that requires you to monitor your policy regularly and manage premiums, death benefits, and cash value growth. It requires a deep understanding of the withdrawal, loan, and policy lapse rules, since not following policy funding or tax regulations precisely can result in a lapse or unexpected tax exposure, particularly for expats holding policies across multiple jurisdictions.
The issues you may face with UL insurance depend on the type of policy you purchase. UL policyholders typically encounter the following universal life insurance disadvantages:
- Management fees.
- Low Interest or crediting rates.
- The rising cost of insurance.
- Implications of obtaining UL insurance loans.
- Cash value inheritance issues.
Management Fees
When you contribute to a UL policy, besides covering the COI, you may also have to pay the following fees:
| Universal Life Policy Fee | How It Works |
|---|---|
| Policy fee | This is typically a fixed monthly or annual administrative charge, such as US $50–$150 per year, covering policy servicing, statements, and account maintenance. |
| Premium load | A percentage deducted from each premium to cover distribution, administration, and (where applicable) local premium taxes. This can range from 2% to 10%, depending on the insurer and jurisdiction. For example, if your insurer applies a 7% load and you pay a US $20,000 premium, US $1,400 is deducted and the remainder is credited to your policy. |
| Per 1,000 charge fee | This is a fee you pay for the first 10 years or so after purchasing a UL policy. It covers the funds the insurance company invested to acquire you as a policyholder. The fee depends on your death benefit sum. |
| Surrender charge | If you cancel a UL policy within the early years (commonly 10–15), you’ll pay a surrender charge that declines over time and can initially range from around 5% to 20% and typically decline over 10–15 years; see your policy’s surrender-charge schedule and base definition. After this charge, you receive the remaining net cash value. |
Low Interest or Crediting Rates
The funds exceeding the minimum required premium (COI) go into your UL cash value, which grows at your insurance company’s interest rates. These interest rates vary depending on the type of UL policy you take out.
For example, indexed universal life (IUL) links growth to a stock market index but does not invest directly in it. In such cases:
- The minimum guaranteed rate (floor) is often 0–2%.
- The maximum credited rate (cap) can vary widely—often 8–12% in favourable conditions, but is not guaranteed.
Caps and participation rates are non-guaranteed and may be reset by the insurer within contractual limits; index dividends are typically not credited.
These rates are set and periodically adjusted by the insurer. Most policies will credit somewhere between the floor and the current cap depending on index performance and policy charges, so actual returns can differ from “illustrated” rates. If the policy’s crediting rate averages below total annual costs (for example, if charges equal 2.5% of policy value), growth may stagnate or decline.
While there are UL policies with guaranteed death benefits, such as guaranteed universal life (GUL) insurance, these are designed to maintain the death benefit at the lowest possible cost and generally offer minimal cash value accumulation.
The Rising Cost of Insurance
The COI increases over time because your mortality risk rises with age. This means you’ll have to use more funds to cover the COI, leaving less for cash value growth, unless premiums are maintained at an adequate level.
The rising COI and the flexible premiums UL policies offer can create challenges. While UL lets you pay less than the “target” premium, you must maintain sufficient cash value to cover ongoing COI and administrative fees.
If you don’t, which can happen as COI rises or credited interest falls, your policy may lapse, leaving your beneficiaries without a death benefit. Some policies include no-lapse guarantees, which can help maintain coverage if funded correctly.
Implications of Obtaining UL Insurance Loans
When you accumulate cash value in a UL policy, you’re allowed to take a portion of it as a loan. Many policyholders see this as a quick way to obtain liquidity, but policy loans differ from bank loans in key ways.
Once you borrow money, you must pay interest, typically variable, and often between 3% and 8%, until the loan is repaid. If you die before repayment, the insurer deducts the outstanding balance and accrued interest from the death benefit, reducing what beneficiaries receive.
Unpaid loans are not withdrawals, but if the policy lapses or is surrendered with an outstanding loan, the borrowed amount can be treated as a taxable distribution of gain in some jurisdictions.
Withdrawals and partial surrenders can also be taxable, usually tax-free up to the amount of premiums paid, but potentially taxable above that, depending on local rules.
Cash Value Inheritance Issues
If you plan to leave the accumulated cash value in a UL policy to your beneficiaries, you need to select the right death benefit option when purchasing the policy.
- Level death benefit (Option A): Beneficiaries receive the specified death benefit, and the insurer retains the policy’s reserve or cash value component as part of fulfilling that amount. Beneficiaries do not receive an additional cash value on top of the death benefit under Option A.
- Increasing death benefit (Option B): Beneficiaries receive the stated death benefit plus the policy’s cash value (or a defined formula amount). Premiums for this option are higher.
This means that, unless you choose the increasing death benefit option, the cash value primarily serves as a funding reserve during your lifetime rather than an additional inheritance.
Expats should also confirm how death-benefit proceeds and cash-value growth are taxed in their country of residence, as treatment differs between jurisdictions.
For example, UK ‘chargeable event’ rules can tax gains on offshore policies, and the Personal Portfolio Bond (PPB) rules can impose a deemed annual gain in certain cases.
How Expats Can Mitigate the Drawbacks of Universal Life Insurance
For expats, many of the disadvantages of universal life insurance can be reduced through careful structuring and ongoing management. Consider the following expat-specific strategies:
- Currency matching: Fund your premiums and set your policy base currency in the same currency as your long-term liabilities (such as school fees, property, or retirement expenses). This helps protect your policy value and death benefit from exchange rate volatility.
- Ownership and trust planning: UL policies can be owned personally or through a trust or company. Using a trust (such as an international life insurance trust or ILIT) may help simplify estate transfer, avoid probate delays, and ensure compliance with local inheritance laws. The suitability and tax implications depend on your country of residence and domicile, so professional cross-border advice is essential.
- Jurisdiction and regulatory alignment: Select a policy issued in a well-regulated jurisdiction that aligns with your residency. Mismatched jurisdictions can create tax-reporting or regulatory complications (for example, the UK’s Personal Portfolio Bond rules or US PFIC and MEC regimes).
- Regular policy monitoring: Request an in-force illustration from your insurer each year to track performance under both guaranteed and current assumptions. Review cost of insurance (COI), cap and participation rates, and surrender values. Adjust funding if the policy begins to underperform or approach lapse.
- Integrate UL within a broader financial plan: Treat UL primarily as a protection and estate planning tool. Use separate, transparent investment accounts for growth assets when appropriate. This approach provides clearer liquidity, flexibility, and diversification.
- Seek independent cross-border advice: Before purchase or restructuring, engage advisers experienced in both life insurance and international tax to ensure that the policy complements your global financial objectives and avoids unintended tax consequences.
Should I Keep My Universal Life Insurance Policy?
If you’ve already purchased a UL policy but are concerned about its drawbacks and their potential impact on your death benefit, you may wonder if you should keep the policy or cancel it. Before you make a decision, do the following:
| Assessment Area | Explanation |
|---|---|
| Assess the Coverage Duration | The coverage ends when the policy reaches its maturity age, which can range from age 95 to 121 depending on the policy contract. Older policies may mature at 85 or 100, but modern UL plans typically run to age 121. Most policies do not automatically reduce the death benefit at a set age, although certain plans may allow the benefit to level off or endow to the cash value at maturity. If your policy matures at an earlier age, it may expire while you are still alive. In that case, you will generally receive the accumulated cash value but no further death benefit, and a taxable gain could arise depending on your jurisdiction’s life-policy tax rules. |
| Obtain an In-force Illustration | An in-force illustration shows how your policy will perform in the future based on the current (not guaranteed) costs, earnings, and fees. You can ask your insurer to provide your in-force illustration annually, but you should especially request it if you notice your policy is no longer accumulating cash value. |
| Get a Cost-Basis or Policy Value Report | Obtaining a cost-basis report (or equivalent value statement) will help you understand the potential tax consequences of surrendering or lapsing a UL policy. For example, any gain above your total paid premiums (cost basis) is usually treated as taxable income. UK-resident policyholders should note that such gains fall under the “chargeable event” rules and may qualify for top-slicing relief. |
If you conclude that UL insurance doesn’t meet your requirements after reviewing these factors, you may consider cancelling the policy. Before doing so, review the surrender-charge schedule to confirm that surrendering the policy provides a net benefit.
To ensure your policy aligns with your cross-border financial and tax goals, consider speaking to a qualified financial adviser and an independent tax specialist such as those available at Titan Wealth International.
Is Universal Life Insurance a Good Investment Strategy?
Using a UL policy as an investment-linked component of a financial plan can be helpful in certain circumstances. For example, you can pair an indexed UL (IUL) policy with a qualifying non-UK pension scheme (QNUPS)—a pension structure that allows overseas asset growth and can be efficient for UK inheritance-tax planning.
This combination may be attractive to UK expats seeking additional flexibility for retirement and estate planning. When combined, UL insurance and a QNUPS may provide advantages such as:
- Tax-deferred or tax-advantaged growth: IUL policies credit returns based on an index such as the S&P 500, offering growth potential within defined caps and floors, while a QNUPS can allow investment growth to roll up free of local tax within the scheme (but UK residents are generally taxed on pension income when drawn).
- Portfolio diversification: Combining QNUPS and IUL insurance diversifies your holdings across asset classes and structures, from market-linked policies to funds, equities, and property.
- Estate and asset protection: IUL offers a death benefit for beneficiaries, while a QNUPS can help mitigate UK inheritance tax and, in some jurisdictions, provide a degree of protection from creditors subject to local trust and insolvency laws.
However, using UL as your only or primary investment is rarely efficient. Because of insurance charges and administrative costs, the internal rate of return is often lower than that of comparable pure investments.
Many expats therefore separate their life-cover needs from investment portfolios, using UL mainly for estate liquidity or cross-border protection planning.
You can also consider holding other assets such as:
- Bonds
- Stocks
- Mutual funds
This approach helps you avoid liquidity or funding pressure within the policy and may offer better long-term growth potential while maintaining transparent taxation and easier access to capital.
Complimentary Expat Universal Life Insurance Review
Universal life insurance can offer powerful long-term benefits for expats, but only when it’s structured correctly for your residency, currency, and jurisdictional tax position. Understanding how policy costs, funding levels, and local regulations interact is essential before you commit.
In a complimentary introductory consultation with Titan Wealth International, you will:
- Assess whether your current or proposed UL structure suits your residency, currency, and estate-planning objectives.
- Understand how policy loans, surrender values, and investment-linked components are taxed across different jurisdictions.
- Explore strategies to align your policy with your wider cross-border financial plan, including currency matching, trust ownership, and jurisdiction selection.
Key Takeaway
While UL insurance offers advantages such as lifelong protection and the potential to accumulate cash value, it also has drawbacks that make it unsuitable for some policyholders, especially if not structured or funded correctly.
In this guide, we’ve explained the main universal life insurance problems, focusing on issues such as:
- Low or capped crediting rates.
- High policy and management fees.
- The rising cost of insurance with age.
- Limitations on passing cash value to beneficiaries depending on death-benefit option.
- The financial and tax risks of taking policy loans or withdrawals.
We also discussed the costs associated with keeping a UL policy active, showing that high charges and rising insurance costs can reduce long-term value unless the policy is properly funded and monitored.
We also further explained how UL functions within an international financial plan, and provided guidance on evaluating whether to keep or restructure an existing policy.
At Titan Wealth International, our financial advisers assist you in selecting jurisdiction-appropriate and regulator-compliant policies that align with your cross-border financial objectives.
We also help you structure coverage to remain effective across different countries of residence, currencies, and tax regimes, ensuring global suitability rather than a one-size-fits-all solution.
The information provided in this article is not a substitute for personalised financial, tax or legal advice. You should obtain financial advice and tax advice tailored to your particular circumstances and in respect of any jurisdictions where you may have tax or other liabilities. Titan Wealth International accepts no liability for any direct or indirect loss arising from the use of, or reliance on, this information, nor for any errors or omissions in the content.
