Should You Keep or Surrender a Universal Life Policy?

“You got to know when to hold ’em, know when to fold ’em, know when to walk away, and know when to run.”—Kenny Rogers, “The Gambler”

should you surrender universal life policy

There’s an ugly truth about universal life insurance policies. While they’ve been sold as a viable alternative to whole life insurance, the reality is that universal life insurance policies aren’t standing the test of time. Aging policy owners are seeing their premiums skyrocket. Lawsuits continue to mount from policy owners who feel they have been misled. Some realize their “permanent” policies will expire before they do! Others realize their policies will lapse if they cannot make ever-increasing premium payments. This was not what most people believed they were signing up for!

In 2019, state regulators in New York issued a cautionary alert to consumers about universal life insurance and the true nature of insurance premiums: that they are not guaranteed level, like whole life insurance. In 2018, the Texas Department of Insurance put out a similar warning. A short informational video illustrated how universal life policies can lose value and even lapse due to ongoing costs, especially in times of low interest rates and underperforming investments.

Now, warnings are great if you are shopping for life insurance. Yet what can you do if you already have a universal life policy that lacks guaranteed level premiums and a guaranteed death benefit? In this article, we’ll outline options and actions that can help protect you from an imploding policy.

Evaluating Where Your Policy Stands

We’ve helped concerned policy owners who wonder what to do with their universal life policies for years. Some common questions are, “Should I keep my universal life policy?” and “Should I surrender my universal life policy?” And there are other options worth considering, such as reducing the death benefit or exchanging your universal life policy. You may have several choices that can make sense. The only thing you should NOT do is bury your head in the sand, cross your fingers, and just “hope” it all turns out!

Before you make any decisions, understand exactly what you’ve got. Start with the policy’s coverage. Some universal life policies only pay to age 90, 95, or 99. As the number of centenarians in the US soars (in 2024 we’ve reached over 100,000 citizens over the age of 100, up from a mere 37,000 in the 90s) your chances of outliving such a policy increase. With some policies, the death benefit will be cut in half at a certain age. (We’re not sure why these policies continue to be described as “permanent policies,” but they are.)

Next, you need an “In Force illustration” of your policy. An In Force illustration provides a picture of your insurance policy as it currently stands. It shows the exact results of what has happened from the policy’s inception to today, including premiums paid and growth of cash value. Most importantly, an In Force illustration also gives you future projections based on current assumptions.

To obtain an In Force illustration, you can contact your insurance company directly or the agent who helped you purchase it. (If you have a 1-800 customer service number on your policy, that’s a perfect starting point.) If you and your spouse both own policies, you will only be able to request illustrations for policies that you personally own.

Typically, you can obtain one free In Force illustration per year. With a universal life policy, it is a good idea to do an In Force illustration at least every couple of years. Ask for an In Force illustration based on current assumptions—meaning with the current scheduled premium. You may also decide to request further In Force illustrations to see how projections may change if you alter the policy. For instance, you may want to see how lowering the death benefit will affect policy projections.

What you’re looking for with the In Force illustration is what we call the “crossover point.” That’s the point at which the policy is no longer growing cash value, but rather consuming it. There is no real rule of thumb of when that might happen—it all depends on the company, the level of premiums paid, the mortality costs inside of the policy, etc.—but we often see that point reached when the insured is in their 80s. The crossover point is critical because once the policy costs start to outpace the growth of the policy, you are at risk of either having your policy implode or facing higher premiums to keep it in force.

Since universal life policies rarely have guaranteed premiums or guaranteed death benefits, it is especially important to look at the “worst-case scenario” projections. If interest rates (or the stock market, in an indexed policy) perform poorly, how will the policy perform? Will rising policy costs begin to consume the cash value? The sooner you are aware of a problem, the more you can do about it.

A “cost-basis report” can also be helpful. This will help you understand any potential tax implications of surrendering a policy. The cost basis of a life insurance policy is the sum of all your insurance premium payments. If you surrender a cash value life insurance policy, any gain on the policy over and above your cost basis (premiums paid) will be subject to federal (and possibly state) income tax. (Note that outstanding loans are also counted as part of the gain.) In general, the amount the policy owner has paid for the policy, up to the cost basis, is tax-free.

What’s the Risk of Keeping Your Universal Life Policy?

The problem with universal life insurance is how the policies are constructed. Universal life and indexed universal life (IUL) policies have changeable costs—especially, mortality costs that rise as the insured ages. As the New York Department of Financial Services warned, “The internal charges of universal life policies can increase every year… as the insured gets older and can be very high in later years.” Eventually, these costs can eat away at cash value, require higher premiums, or cause a policy to implode. If that happens, you end up with a lapsed policy—no death benefit, no cash value, nothing.

So a universal life policy can be a bit of a gamble—literally. You have to determine what your chances are of having the policy last until you die. If you have, for example, a cash value of $50k and a death benefit of $100k, and you are nearing that crossover point, you have to estimate the odds of the policy staying in force to pay a death benefit. You can always choose to quit and walk away with what you have—your cash value (subtract any surrender charges).

In addition to information gathered from an In Force illustration, there are many factors to consider, such as:

How new is your policy? If a policy is fairly new and you are still in good health, you might consider surrendering it before you put more dollars into it. You could start from scratch with a whole life policy—or even a combination of whole life and term—and be able to have confidence in how your life insurance will perform.

What is your estimated life expectancy? The not-so-funny joke about how to avoid universal life policy problems is, “Don’t live too long!” And unfortunately, there’s truth to this.

If the crossover point for your policy will be reached before age 90 and you are 80, active, and healthy with an excellent family history of longevity, your universal life policy may be a bad bet. Life expectancy calculators found on Livingto100.com and the Blue Zones Vitality Test can be helpful.

If your premiums increase, can you still pay them? Unfortunately, some seniors are forced to lose or surrender their policies when nearing life expectancy because they simply can’t afford higher premiums.

What Can You Do with Your Universal Life Policy?

If you believe there is a reasonable chance that you will outlive your policy or have to pump increasingly large premiums into it to keep it afloat, you have several options.

Surrender Your Universal Life Policy?

If the prognosis isn’t good, sometimes it’s best to just walk away. Like the saying, “A bird in the hand is worth two in the bush,” sometimes keeping your cash value and surrendering the death benefit is a wise move. You can at least put that money to work somewhere else.

If surrendering the policy will create a tax problem (not likely, yet possible), consider exchanging the policy instead. (See below.)

If you will pay surrender charges now that will soon drop off, evaluate if it makes more sense to keep the policy for now and surrender it later (perhaps reducing your death benefit in the meantime).

Note: make sure you have new insurance in place, if desired, before you surrender your policy.

Reduce Your Death Benefit?

Shrinking the size of the policy’s face value can be an effective strategy. By reducing the death benefit, you reduce the mortality costs of the policy. This can actually stretch the life expectancy of your universal life insurance policy!

If you have held the policy for a time and funded it well, sometimes it is even possible to reduce the death benefit to a level where you can stop making premium payments. There’s little downside to this strategy if it works as intended! However, the death benefit and premium level will not be guaranteed as they would be with a whole life policy—it is only projected. Keep tracking the policy with In Force illustrations so you know if things change.

Exchange Your Universal Life Policy?

You can roll the cash value into a different type of life insurance product, such as a whole life policy or a single premium immediate annuity. If leaving an inheritance is your priority, a whole life or single premium whole life policy can be a good option. If increasing your cash flow is your priority, an annuity can serve your needs well.

Unfortunately, it’s likely your policy has not built up a lot of cash value, which won’t make you feel like you’re getting a lot of bang for your buck. Still, this is a viable strategy and it will also help you avoid any taxable gains.

Keep Your Universal Life Insurance Policy?

This can be a reasonable option if you believe your policy will outlive you rather than vice versa. Just do so with your eyes open, checking In Force illustrations regularly. If you live significantly longer than you think, you’ll want to be aware if the policy starts cannibalizing the cash value.

A Combination of Strategies?

It doesn’t have to be all or nothing. For instance, you might reduce the size of a universal life policy, keep it, and purchase a small whole life policy to ensure you have additional coverage. Now, if you hit that “crossover point” and decide to surrender your policy later, you’ll still have a permanent policy in place. Even if you don’t have a UL policy, multiple smaller policies can make more sense than one larger policy.

Do You Need a Life Insurance Pro?

Kim D. H. Butler is an industry veteran and recognized authority on whole life insurance. She has been at the forefront of alerting consumers to the inherent problems with universal life insurance—before it was headline news in the Wall Street Journal and New York Times! Kim has also written two recognized books on the topic: Live Your Life Insurance and Busting the Life Insurance Lies.

To schedule an appointment with Kim to discuss your situation, contact Prosperity Thinkers today.

16 thoughts on “Should You Keep or Surrender a Universal Life Policy?”

  1. 250K policy on an 89 year old, account value reduced from 17k to 15k in one year, base police expence is 6k a year. premium is 239. Do I make the extra 440 payment to keep base police from eating up the account value? Policy good until 100, don’t see the insured making it until then.

  2. Hello, my husband and I are 34 and we’ve had an IUL with Transamerica for 2 years. The face value is 300,000 each and we are paying $200/month each. We recently spoke with someone who sells Term life insurance for Primerica and they advised that having an IUL was a terrible idea in the long run and that we should go with a term policy instead. We could get $800,000 face value each for under $250 total.

    We know the person we spoke to isn’t impartial because they are obviously trying to sell us a product. We are wondering if it is beneficial to have both policies? Lower the amount we are putting into the IUL and also obtain a term policy? Or should we cut our losses with the IUL and see how much a surrender fee would be. Currently the cash value is only about $3000 in each. We are currently having a house built and will be planning to have kids in the future so we know the $300,000 policies would not cover what we need, but we were sold on the potential to pull money out at some point.

    Thank you

    1. Prosperity Thinkers

      Hello,
      There are so many wonderful questions in your comment and I think they would be best addressed in a one-on-one meeting for your particular situation. We are always here for you and happy to help answer these questions. Please call us at 877-889-3981 x 108 or email to set up an appointment here we*****@pr****************.com

  3. Hello, I’ve a Fixed Universal Life Insurance from AIG. I reduced the face value on the 6th year and still not sure if it makes sense to continue with the policy or cancel and absorb the ~30K loss (what has been invested so far minus surrender value). Can you please advise.

    1. Prosperity Thinkers

      Hello Raxit,

      This is a very specific example and we have a few more questions about your policy. Please reach out to us by calling 877-889-3981 x 108 or emailing we*****@pr****************.com

      We are always happy to help.

      Thank you,
      P4P Team

  4. mildred mary rabbitt

    my husband has variable universal life ins he has been paying since 1987 at 48 yrs old he is now 82 and he wants to take out the cash value and cancel the policy but we dont understand the cash value on our statement it says cash value was 69,212.10 on 3-25-20 but now as of 3-25-21 he now has 114,573.18 cash value the policy was 100,000.00 with now a death benefit of 120,302.00 so he wants to take the cash value and cancel the policy and reinvest the cash value money can you advise if this is a good idea

    1. Prosperity Thinkers

      Hi Mildred,

      Thank you for reaching out! We are happy to help you sort this out.
      First, we ask that you request an “inforce illustration” from your current policyholder. Once you have this illustration in hand feel free to contact us to schedule a time to chat further.

      You can schedule time by
      phone: (877)889-3981 x 108
      email: we*****@Pr****************.com

    1. Prosperity Thinkers

      Hi Jill,

      Thank you for reaching out! Without taking a look at your policy we could not say for sure.
      Please reach out to your agent to determine what your death benefit is and if they are unsure we are always happy to help at we*****@pr****************.com or (877) 889-3981 ext. 108

  5. I have a single premium ($5,000) universal life policy bought in 1984. Kemper Living Life. It has a guaranteed 4% rate (at time it was bought, it paid 10% +) and I understand that it has settlement options that allow it to work much like a tax deferred annuity. The policy end is my 100 BD. On the statements I receive each year, there is no cost of insurance listed and my cash value is increasing by the 4% and my death benefit is increasing too. Is this too good to be true and represents a 4% guaranteed savings account that I have option to annuitize and provide stream of income whose only downside is if I do this, I lose death benefit? Product of the narrow time it was bough in early 1980’s? Should I deposit more? Thanks!

    1. Prosperity Thinkers

      Hi James,

      Thank you for sharing! We would suggest reaching out to your carrier and requesting an inforce illustration. Once you’ve received the illustration take a look at both the guaranteed and the non-guaranteed columns. Without looking at your policy but being in the industry for so long we predict that you’ll see the 4% is a gross guaranteed rate, all the costs are coming out of it and we are quite certain this policy will not survive. The inforce illustration will make that very obvious.

  6. I have three uvl that universal life insurance policies that I’ve had for over 10 years and I am turning 65 and should I turn on one two or all three at 65 because after 10 years did they don’t grow anymore at a guarantee rate

    1. Prosperity Thinkers

      Hi Gary,

      We are so sorry to hear you’re having trouble with your UVL. This is a prime example and motivation to share this information with the world.

      If you’d like help sorting this out or more information about your options please reach out to us via email here we*****@pr****************.com

  7. How much twould i need to pay if taxes should ipay if surrender.
    Tennessee, $1,765.98, is the amount. I have not found this answer yet! Do I have insur. Take it or should I just take full amount then hold some back? Do I even need to pay taxes?

    1. Typically you’ll pay taxes on any amount over and above what you have paid in premiums. If you want life insurance then definitely do not cash out the whole policy! Withdrawing some cash will shrink the policy but won’t end it.

  8. Jennifer Hines

    Great article, Kim!
    Question – do you have any connections for health insurance for my small business? I have one full time employee besides myself.
    Thanks!
    Jennifer

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