Many universal life policies still in force today were designed around interest rate assumptions far higher than what those policies have actually credited. Clients often don’t realize their coverage may be heading toward lapse. A proactive review can protect the death benefit — and your relationship.
Key takeaways
- Current-assumption UL policies depend on credited interest and cost-of-insurance charges, so lower-than-illustrated crediting can quietly shorten how long coverage lasts.
- An in-force illustration at current and guaranteed assumptions is the best way to see whether a policy is on track.
- Options range from increasing premium or reducing the face amount to exchanging into a policy with stronger guarantees, depending on health and goals.
LIMRA research has found that 21% of consumers had no idea what type of coverage they had bought — many owners of older UL policies don’t know it can lapse.
Why older UL policies can drift off course
Universal life was built on flexibility: the owner pays premiums into an account, the carrier credits interest, and monthly cost-of-insurance and expense charges come out. Premiums were often set at the minimum needed to keep the policy in force under the interest rate illustrated at the time of sale.
When actual crediting falls below that illustrated rate for many years — and when cost-of-insurance charges rise with age — the cash value can erode faster than expected. A policy that looked guaranteed to age 100 may now be projected to lapse in the client’s 80s, precisely when replacing coverage is hardest.
Warning signs that call for a review
- The policy was issued many years ago on a current-assumption (non-guaranteed) basis
- Premiums have been paid at the originally illustrated minimum, or skipped
- Cash value has been flat or declining on annual statements
- The client has taken loans or withdrawals
- The carrier has announced cost-of-insurance changes
- The client can’t say how long the coverage is expected to last
Research from LIMRA has found that more than 60% of life insurance shoppers are proactive, often prompted by a desire to review coverage. Many clients will welcome the call.
How to run the review
Request an in-force illustration from the carrier showing projected values at both current and guaranteed assumptions, using the premium the client is actually paying. Then answer three questions:
- At current assumptions, when does the policy lapse?
- What level premium would carry it to the client’s target age?
- Is the original need still the right need today?
If the client’s health is good, new underwriting may open better options. Our field underwriting guide can help you gauge where a client may qualify before you apply.
Options when a policy is underfunded
- Increase premium to restore the projected duration
- Reduce the face amount to fit the existing funding
- Exchange into a guaranteed UL or other product with stronger guarantees, potentially through a tax-free 1035 exchange
- Add long-term care or chronic illness benefits where a modern policy can address additional needs
Any replacement should be evaluated carefully against surrender charges, new contestability and suicide periods, and the client’s current insurability. Our team can help you run the comparisons.
Frequently asked questions
Can a universal life policy lapse even if premiums were paid?
Yes. If the premium paid was based on an illustrated interest rate that wasn’t achieved, or if cost-of-insurance charges increased, the cash value can run out and the policy can lapse despite regular payments.
What is an in-force illustration?
It is a current projection from the carrier showing how an existing policy is expected to perform going forward, at both current and guaranteed assumptions, based on the premiums you specify.
Is a 1035 exchange a good fix for an underfunded UL policy?
It can be, if the client is insurable and a new policy provides stronger guarantees at an acceptable cost. It should be compared against increasing premium or reducing the face amount, considering surrender charges and new contestability.
Reviewed by Tim Fuller on 2026-09-25
Tim Fuller
President, SRS Inc.
Tim leads SRS Inc., a full-service IMO (Independent Marketing Organization) and BGA (Brokerage General Agency), connecting independent financial professionals with life, annuity, disability income, and long-term care solutions from 60+ carrier partners.
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