When considering life insurance policies, two of the most popular options are whole life and universal life insurance. Both offer unique features and benefits that cater to different financial needs.
However, when it comes to life settlements — the sale of an existing life insurance policy for a lump sum — there are noticeable differences between these policy types. Understanding how life settlements work for universal life vs. whole life insurance can help you better determine which policy to sell.
You can use this guide to learn how whole life vs. universal life settlement works as well as the pros and cons of each.
WHOLE VS. UNIVERSAL LIFE INSURANCE: WHAT’S THE DIFFERENCE?
Whole life and universal life insurance policies are permanent life insurance. This means the policy will last until the insured’s death as long as premiums are kept up to date.
However, there are three key differences between whole and universal life policies:
- Premium structure: Whole life has fixed, predictable premiums while universal life premiums can be adjusted (within limits) to fit changing financial needs.
- Cash value growth: Whole life cash value grows at a fixed interest rate. Universal life policies are tied to current interest rates or market performance.
- Policy flexibility: Whole life policies offer little to no flexibility, whereas universal life policies are highly flexible to adjust premiums and the death benefit.
These three factors play an important role in whole vs. universal life settlements, especially when it comes to getting the most value out of an unneeded or expensive life insurance policy.
HOW CASH VALUE DIFFERS FOR WHOLE LIFE VS. UNIVERSAL LIFE SETTLEMENTS
The cash value of a whole life insurance policy grows at a fixed interest rate. The fixed rate means a buyer is guaranteed cash value accumulation at a predictable and stable rate. This stability can also make the valuation process easier, which could lead to a faster settlement process.
However, policyholders who’ve held their policies long enough to generate significant cash value may be able to get more for their policy by surrendering it back to the insurance company. In these cases, settlement buyers would need to bring higher settlement offers than the surrender value, which may limit the amount of offers available to a policyholder.
The variable nature of cash value in universal life policies can make them both appealing and challenging for settlement buyers. Variability makes it more difficult for buyers to value a policy, but it can potentially increase returns for the buyer. As a policyholder, this means your universal life policy may be more attractive to buyers than other types of policies.
WHOLE LIFE VS. UNIVERSAL LIFE SETTLEMENT: WHICH SHOULD YOU CHOOSE?
There’s no one-size-fits-all rule when it comes to choosing between a whole life or a universal life settlement. The differences between whole and universal life policies can affect the value of your settlement and the number of offers you receive.
Additionally, the details of your policy itself can affect the benefits of selling it. One way to determine if a whole or universal life settlement is better for you is to consider the pros and cons of each type of settlement.
Pros and Cons of Whole Life Settlements
The benefits of a whole life settlement include:
- Straightforward settlement offers: With guaranteed cash value growth and a fixed death benefit, whole life settlements offer a streamlined settlement process that helps you get money for your policy quickly.
- Attractive to buyers: The predictability of a whole life policy makes it attractive to buyers and can increase its value on the settlement market.
The downsides of a whole life settlement include:
- Surrender value can limit offers: While a newer whole life policy can increase offers, older policies may be more valuable to you in surrender. A policy with a surrender value close to the death benefit won’t be attractive to a settlement buyer, as their offer will need to be higher than the surrender value.
Pros and Cons of Universal Life Settlement
The advantages of a universal life settlement include:
- Higher returns than surrender value: The surrender value of a universal life policy is often much lower than the offers you’ll receive on the settlement market.
- Attractive to buyers: Universal life policies have the potential for higher returns and lower premium costs than whole life policies, making them appealing to buyers. As a policyholder, you may receive more high-value offers for your universal life policy.
The disadvantages of selling your universal life policy include:
- Economic conditions can affect settlement amount: As the returns on a universal life policy can fluctuate, settlement offers may be lower in times of economic downturns.
OTHER CONSIDERATIONS WHEN IT COMES TIME TO SELL YOUR POLICY
The pros and cons of whole life and universal life settlements aren’t the only factors to weigh when selling your life insurance policy. In addition to the unique factors of your policy type, you’ll also need to consider:
- Cash value surrender amount: A high surrender value may be a better option than trying to sell your policy.
- Outstanding policy loans: Outstanding loans on your policy can affect the net proceeds of your sale.
- Premium amount: The premium costs of your policy may change the amount of settlement offers.
- Death benefit: Policies generally need at least a $100,000 death benefit to qualify for settlement.
- Insured’s age and health: Most settlement buyers look for policyholders who are 65 or older. Someone in poor health or with a terminal condition may receive more settlement offers than someone young and healthy.
- Financial needs: You should consider your financial situation when selling your policy. For example, if you paid off your mortgage and no longer need your insurance policy, you might want to sell the policy and enjoy the benefits of immediate cash.
DOES YOUR PERMANENT LIFE POLICY QUALIFY FOR SETTLEMENT?
Choosing between a whole life vs. a universal life settlement comes down to understanding which policy offers the best value on the life settlement market. Whole life policies offer stability, which could make them attractive to some settlement buyers. Universal life settlements, meanwhile, often offer a higher payout for policyholders than surrendering the policy for cash value.
It can be difficult for policyholders and financial advisors to know when a whole life settlement or universal life settlement makes sense. The Life Settlement Advisors team can help you better understand your potential settlement options. Learn more and see if your policy qualifies for settlement today.
