Avoiding the Policy Lapse Trap: Common Mistakes in Managing Universal Life

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Avoiding the Policy Lapse Trap: Common Mistakes in Managing Universal Life

Universal Life (UL) policies are popular for their premium flexibility, but this very feature makes them prone to lapsing if not managed correctly. Policy lapse is the biggest risk with UL and IUL policies, potentially leading to the loss of coverage and significant tax liabilities.

Three Major Management Mistakes

  1. **Underfunding:** Consistently paying only the minimum premium or taking premium “holidays” without checking the policy’s internal value. Over time, the cash value cannot keep up with the increasing Cost of Insurance (COI).
  2. **Ignoring Performance Reports:** Failing to review the annual policy statement, which shows the actual cash value growth versus the projected rate. Low-interest periods can deplete the cash value faster than expected.
  3. **Excessive Loan Interest:** Allowing policy loans and the accrued interest to grow larger than the remaining cash value. This creates a high risk of lapse and the potential for the outstanding loan to be immediately taxed as income.

Unlike Whole Life, UL requires **active monitoring** to ensure the cash value remains robust enough to sustain the policy to its intended maturity date.

Disclaimer: This content is for informational purposes only and is not financial or legal advice. If you own a UL policy, treat the annual statement review as a mandatory financial check-up.