Universal vs. Whole vs. Term: Choosing the Right Insurance Policy to Sell

Clock July 01, 2024


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When it comes to life insurance, the decision to sell your policy can be a strategic financial move, especially for those age 70 and above. Understanding the differences between universal, whole, and term life insurance policies is crucial in making an informed decision. This guide will help you navigate the complexities of each policy type and determine the best policy to sell for cash.

Selling a life insurance policy, known as a life settlement, can provide a significant cash payout to policyholders who no longer need or can afford their coverage. There are various types of life insurance policies, each with unique features that impact their value and sale potential. This article will explore whole, universal, and term life insurance policies, offering insights to help you choose the right one to sell.

Comparative Analysis of Life Insurance Types

Universal Life Insurance: This permanent policy type provides flexible premiums and death benefits, along with a cash value that earns interest.

Whole Life Insurance: Known for its permanence, whole life insurance offers lifelong coverage and a cash value component that grows over time.

Term Life Insurance: Unlike the other policy types, term life insurance provides coverage for a specific period of time and does not accumulate cash value. Its primary value lies in the death benefit.

Each of these policies has distinct advantages and limitations when it comes to selling. The following sections will delve into each type in detail, discussing their structure, benefits, and how they impact the ease and profitability of selling.

Universal Life Insurance

Universal life insurance is the type of policy most often associated with life settlements. These policies offer flexibility in premium payments and death benefits, along with a cash value component that can earn interest. So long as the required premiums are paid, the policy will generally remain in force until the insured passes, which means investors are far more likely to earn a return on their investment. Additionally, the flexibility of universal life policies (which can include traditional universal life, survivorship universal life, variable universal life, guaranteed universal life, and other variations) can be advantageous when selling the policy, as it may increase the policy’s attractiveness to buyers.

Advantages of Selling Universal Life Insurance:

  • Permanent Policy: So long as the premiums are paid on time, the policy is guaranteed to remain in force until its maturity date (for newer policies, this is usually well after the insured would turn 100 years old) or until the insured passes.
  • Flexible Premiums: Policyholders can adjust premiums, which can keep the policy in force longer at a desired price point.
  • Interest Accumulation: The cash value can grow based on interest rates, potentially increasing the sale value.

Considerations for Selling:

  • The longer the maturity date (which sometimes can exceed 120 years old) the more attractive it is to investors. Policies that mature before the insured turns 100 are riskier for investors, and less favored in life settlements.
  • The cash value’s growth is tied to interest rates, which can fluctuate.

Whole Life Insurance

Whole life insurance policies can be appealing to buyers because of their guaranteed death benefit payout, as well as their cash value component. This built-in savings element can be accessed by the policyholder during their lifetime. When selling a whole life insurance policy, the accumulated cash value can add to the value of the policy in an investor’s eyes.

Benefits of Selling Whole Life Insurance:

  • Guaranteed Benefit: Whole life policies offer a guaranteed benefit so long as the premium payments are maintained, adding stability and predictability to the investment.
  • Long-Term Coverage: Lifelong coverage ensures that the policy will eventually pay out, making it a secure option for buyers.
  • High Cash Value: The cash value increases over time, potentially making older policies more attractive.

Ideal Scenarios for Selling:

  • If you no longer need life-long coverage.
  • If you need a significant cash sum for immediate financial needs.
  • If you want to eliminate premium payments in retirement.

Term Life Insurance

Term life insurance is generally less favorable when it comes to selling the policy in a life settlement. Unlike universal and whole life insurance, term policies are not permanent, and are not guaranteed to pay out a benefit. Only if the insured passes during the policy term (the pre-determined number of years the policy will be active once issued, and assuming premiums are paid on time) will the policy pay a benefit to the beneficiaries. Additionally, term policies lack a cash value component. With those items in mind, term policies can still be sold in a few circumstances.

First, if the policy is convertible, it may be of interest to investors. Convertible term policies have the option to be converted into permanent policies, which are much more favorable for investors. Second, non-convertible term policies can be sold, but generally only in instances where the insured has severely impaired, or even terminal, health.

Selling Term Life Insurance:

  • Not Permanent: Term policies are not permanent and are not guaranteed to pay a benefit upon the insured’s passing. This makes them generally less favorable to investors looking to purchase life insurance policies.
  • Conversion Options: Some term policies can be converted to permanent policies, which makes them more appealing to buyers in a life settlement.
  • Non-convertible policies: In some cases, non-convertible term policies can be sold, however it usually requires the insured to have severely impaired or terminal health.

When Selling is Viable:

  • The policy is convertible to a permanent policy.
  • The policyholder’s health status has deteriorated, increasing the likelihood of payout.

Factors to Consider When Selling Your Policy

When deciding to sell your life insurance policy, consider the following factors:

  • Policy Age: Often, policies issued after the year 2000 are more viable for life settlements due to their unique characteristics.
  • Health Status: Changes in health can impact the policy’s value and buyer interest.
  • Financial Needs: Immediate financial needs can drive the decision to sell.

Understanding the differences between whole, universal, and term life insurance policies is crucial when considering selling. Each policy type offers unique benefits and challenges that can impact its sale potential. Consulting with financial advisors or life settlement experts like Lighthouse Life can provide valuable insights and help you navigate the complexities of selling your life insurance policy. By making an informed decision, you can optimize the financial benefits and ensure your needs are met.

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