Universal Life Insurance: How Does it Work? Does It Build Cash Value?

Clock July 22, 2022


30 Second Summary

Selling a universal life insurance policy, a transaction known as a life settlement, is an option for policyholders who no longer want or need their coverage. This can provide immediate cash value, often more than the policy’s cash surrender value. When compared to letting a policy lapse or surrendering it, selling can be of greater financial benefit.

Surrendering a policy only provides the cash surrender value, which may be significantly less than what could be obtained from a sale. Letting a policy lapse means you forfeit all the premiums you’ve paid without receiving any financial benefit in return. Therefore, if a universal life insurance policy no longer serves its intended purpose, selling it through a life settlement can be a viable – and smart – alternative.

An adult daughter serving as a caretaker for her father

First introduced in the United States in 1979, universal life insurance is perhaps the least understood life insurance product ever brought to the market. However, investing the time to understand universal life insurance can increase its value to you, particularly if your situation has changed since you bought your policy.

This article will answer some of the most often-asked questions about universal life insurance, including:

  • What is universal life insurance?
  • How is universal life different than whole life insurance?
  • Does universal life insurance build cash value?
  • Can you sell a universal life insurance policy?

In addition, we’ll explain how selling your universal life insurance policy can be worth substantially more money to you and your family rather than simply surrendering it to the life insurance company.

What is universal life insurance?

Universal Life Insurance is a type of permanent life insurance that offers lifelong coverage (provided required premium payments are made), similar to whole life insurance. It’s designed to provide financial protection for your loved ones upon your death while also offering a savings component known as cash value. The cash value of a universal life insurance policy accumulates over time on a tax-deferred basis, providing an additional resource you can tap into if needed.

One of the defining features of universal life insurance is its flexibility. Unlike whole life insurance, where premiums are typically fixed, universal life allows policyholders to adjust their premiums and death benefits within certain limits. This means you can increase or decrease your premium payments based on your current financial situation. Additionally, any interest earned on the cash value of the policy is usually adjusted monthly, allowing the cash value to potentially grow more quickly when interest rates are high.

How is universal life different than whole life insurance?

Universal life insurance and whole life insurance are both types of permanent life insurance that provide lifelong coverage, a death benefit, and cash value accumulation. However, they differ significantly in terms of flexibility, premiums, benefits, and how the cash value can be used.

One major difference lies in the flexibility of universal life insurance. Unlike whole life insurance where premiums are fixed, universal life insurance offers flexible premium payments. This means policyholders have the ability to increase or decrease their premium payments as per their financial situation. However, it’s crucial to remember that using the cash value to pay premiums can reduce the death benefit and potentially result in the lapse of the policy if not managed carefully.

Additionally, universal life insurance allows for an adjustable death benefit. Policyholders can choose to increase or decrease the death benefit amount, within certain limits, based on changing needs over time. It’s important to note that while the death benefit is guaranteed in a whole life policy, in a universal life policy, it may vary based on the performance of the policy’s cash value.

The way cash value works in these policies also differs. In a whole life insurance policy, the cash value grows at a guaranteed rate. Conversely, with universal life insurance, the cash value growth is tied to a stated interest rate or the performance of the insurer’s investments, which means it can fluctuate based on market conditions.

Does universal life insurance build cash value?

Universal life insurance is a type of permanent life insurance policy that not only provides a death benefit but also builds cash value over time. This cash value accumulation is one of the most attractive features of universal life insurance. The policy’s cash value grows based on the premiums you pay and the interest the account earns. When you pay your premium, a portion goes toward the cost of the insurance, and the remainder goes into the cash value account.

Contributing more than the minimum required premium can accelerate the growth of the cash value in your universal life insurance policy. The excess premium payment, after covering the cost of insurance and other fees, is added to the cash value account. This extra amount then earns interest, often at a rate specified by the insurer or linked to a specific market index, which can potentially result in faster cash value accumulation.

Also, remember that withdrawing from the cash value or taking out loans against it can reduce the death benefit and potentially result in tax consequences. Therefore, it’s always advised to consult with a financial advisor to understand the specific details related to your policy.

Can you sell a universal life insurance policy?

Selling a universal life insurance policy through a life settlement is an option that many policyholders are unaware of. A life settlement is a transaction where the policyholder sells their life insurance policy to a third party for more than the policy’s cash surrender value but less than its net death benefit. The buyer then takes over the premium payments and becomes the beneficiary of the policy upon the original policyholder’s death.

There are several reasons why you might consider selling your universal life insurance policy. Changing financial needs might make the policy no longer necessary or affordable. For instance, if the original purpose of the policy was to provide for dependents who are now financially independent, you might not need the coverage anymore. Additionally, the cost of insurance in a universal life policy can increase over time, making the premiums unaffordable.

Another reason to consider a life settlement is the desire to stop making premium payments. After selling the policy, the buyer will take over paying the premiums. This can free up funds for you to use for other expenses or investments.

Compared to borrowing against the policy or surrendering it, selling a universal life insurance policy through a life settlement can be more rewarding financially. Life settlements typically offer higher payouts than the cash surrender values of policies. For policies that qualify, the life settlement payout is usually 4-10x the policy’s cash surrender value.

However, it’s important to note that preventing policies from lapsing is another key benefit of life settlements. If you can’t afford to keep paying the premiums, the policy could lapse, meaning all the money that was put into it would be lost. By selling the policy, you can recoup some of this investment.

Working with experienced professionals

Working with experienced professionals when selling a life insurance policy is crucial to ensure that you get the best possible outcome. Life settlement transactions can be complex and require expert knowledge to navigate successfully. As such, partnering with reputable life settlement professionals, such as Lighthouse Life, can provide significant benefits. These professionals have substantial experience in routinely handling these transactions and are well-equipped to guide you through the process.

There are several qualities that you should look for in a life settlement provider. Transparency is one of the most important. A reputable provider will be clear about all aspects of the transaction, including potential risks and benefits, fees, and the process itself. They should provide you with all the information you need to make an informed decision about whether to sell your policy.

Another key quality to look for in a life settlement provider is positive customer reviews, as well as a lack of complaints against the company. If a provider consistently receives 5-star customer reviews on multiple review sites (for example, Google, Better Business Bureau, and Birdeye), it is an indication that they treat their customers well, provide a fair payout for policies, and make the process as simple as possible. Conversely, if a company receives negative reviews and complaints, it can be an indicator that they have less of a focus on providing a great customer experience, and may have a more difficult process to navigate.

Taking the first step

Taking the first step to sell your life insurance policy can be a significant financial decision. It’s an option worth exploring, especially if your policy no longer serves its original purpose or becomes too expensive to maintain. Selling your universal life insurance policy can provide immediate cash which can be used for various needs like paying off debts, funding retirement, or covering healthcare costs. It’s important to understand that selling your policy is not a decision to be made lightly, and it’s advisable to seek professional advice before proceeding.

One of the best ways to start exploring this option is by obtaining a free, no-commitment estimate to assess the potential value of your policy. Companies like Lighthouse Life can evaluate your policy and provide a no-commitment estimate of its value in a life settlement. This initial assessment can give you an idea of how much money you might receive from selling your policy, helping you make an informed decision about whether this path is right for you.


How is the value of my policy determined when I decide to sell it through a life settlement?

The value of your policy in a life settlement is determined by several factors. These include the death benefit amount, the cost of premiums, the type of policy, and the health and age of the insured. Buyers typically pay more for policies that have larger death benefits, lower premium costs and are held by older or less healthy individuals. This is because such policies will likely require less money to maintain until the death benefit is paid. Each buyer may evaluate these factors differently, so it’s advisable to get offers from a life settlement company like Lighthouse Life to ensure you get the best price.

Can I sell a universal life policy that has been in force for only a few years, or do I need to wait a certain period before selling?

Yes, it is possible to sell a universal life insurance policy that has been in force for only a few years, although there is a minimum amount of time that must pass between the issuing of the policy and its ability to be sold. This time span, called the “contestability period,” is generally two years. Beyond waiting past the contestability period, the feasibility of selling a policy soon after its issue depend on various factors, including the type of policy, its cash value, the health status of the insured, and the cost of premiums. It’s also important to note that buyers typically prefer policies held by older individuals or those in poor health, as these policies are likely to pay out sooner. Therefore, while selling a relatively new policy is sometimes possible, it may not always be the most financially beneficial option.

Will selling my policy through a life settlement affect my beneficiaries or the death benefit they would receive?

Yes, selling your life insurance policy through a life settlement will indeed affect your beneficiaries. Once you sell your policy, you no longer own it, and the buyer becomes the new beneficiary. This means that when the death benefit is paid out, it will go to the new owner of the policy, not your original beneficiaries. Therefore, if you’re considering a life settlement, you should discuss it with your intended beneficiaries and consider their financial needs before making a decision.

What are the potential tax implications of selling my universal life insurance policy for cash?

Selling your universal life insurance policy for cash through a life settlement may have tax implications. The proceeds from the sale might be subject to income tax depending on how they compare with the basis, which is the total amount of premiums you’ve paid into the policy. Generally, any amount you receive up to the basis is not taxable. However, any amount that exceeds the basis is typically considered ordinary income and may be taxed accordingly.

Furthermore, if you receive an amount that surpasses the policy’s cash surrender value, the excess may be taxed as capital gains. It’s important to consult with a tax advisor or financial professional to understand the specific tax implications based on your individual circumstances.

How long does the process of selling a universal policy through a life settlement typically take?

The process of selling a universal life insurance policy through a life settlement depends on various factors, including how quickly the necessary documentation is gathered and submitted, the underwriting process, and how rapidly the offer to purchase the policy is accepted. The process involves several steps, such as completing an application, gathering medical records, getting the policy appraised, receiving offers, and finalizing the sale. Each of these steps can vary in duration.

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