Whole Life vs. Universal Life: Does One Make a Better Life Settlement?

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Advisors often ask a variety of questions regarding the potential value of a client’s insurance policy. And frankly, value has a lot to do with the type of policy that the insured is trying to sell. A recent article by Robin Weinberger and Peter Katz asks if whole life policies are too good for a life settlement.

The answer: not at all, and it always boils down to the conditions. Whole life policies that have been held for a long period of time may be difficult to sell as a life settlement, but it’s not that they’re “too good.” It’s that they generally provide the insured with other options.

The Strengths of Whole Life

Specifically, Weinberger and Katz highlight that traditional whole life endows, which means that the policy builds cash value. Depending on the age of the insured and the age

of the policy, there’s a chance that the policy’s cash surrender value may be equal to the death benefit. This means the initial investment in order to buy the policy is much higher than you might find on a younger policy—one that is a little over two years old, for example.

Take this example: if a 70 year old man has a whole life policy that he’s had for roughly 25 years, the cash payout if surrendered may be $750,000 on a $1 million policy. If that were the case, a buyer would need to offer that much (or more) as a life settlement, which lessens interest in the policy.

However, the life settlement market is built around seniors who have policies that they simply don’t need or can no longer afford. If a 70 year old man purchased a $1 million policy three years ago, its cash surrender value may only be $30,000, but the man might get $100,000 for it as a life settlement.

The Other Side of Universal Life

Universal life, on the other hand, doesn’t offer as strong a relationship between cash value and the death benefit. While it does build cash value, it does so more slowly. That

means if the insured lets the policy lapse or tries to surrender it, the cash surrender value is much less than the insured is likely to get if he or she opts for a life settlement.

Another Whole Life Option

So are whole life policies completely out of the running for a life settlement? Ultimately, no. Usually, though, only an insured with a short life expectancy or one with a relatively young policy can expect to sell his or her policy as a life settlement.

However, as Katz and Weinberger point out, some whole policies come with term riders. If these term riders are convertible to universal life, then they can immediately become a better option for a life settlement.

If you or one of your clients has a policy they no longer need, a life settlement may be an option to get greater value from your policy. Complete our qualification calculator to see if it’s an option for you.

I would be happy to answer any questions you may have about this or any other life settlement topic. I can be reached at 888-849-0887, or llagrotte@lsa-llc.com.

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