August 6, 2019
At Q Life Settlements we are often asked which type of life insurance is best for a life settlement consideration. Not only do the many different types of life insurance products out there cause confusion, the terms that insurance companies use to describe their products may differ from one company to another. In this article we will discuss the two fundamental types of life insurance: Term and Permanent life insurance, but each category has a handful of subtypes that we will cover soon in our next installment.
Term Life Insurance
Term life insurance is the most common life insurance product on the market, its appeal being that it provides affordable life insurance coverage for a given period of time (typically 20 years). But because the guaranteed level term premiums are so affordable, once that term expires the premiums tend to sky rocket. Many term policies offer a conversion option that may expire on a certain policy anniversary date and/or when the insured reaches a certain age.
Permanent Life Insurance
The other major category of life insurance is Permanent life insurance, which includes Whole Life, Variable Life, and Universal Life policies. While Whole Life policies do have a level premium, like Term policies, the premium is much higher than Term policies as Whole Life is designed to accrue significant cash value over the course of the policy. Variable and Universal policies do not have a required level premium, a policy holder with these types of life insurance can pay as little as the monthly cost of insurance which increases monthly, and any amount paid into the policy above the cost of insurance accrues in an account either tied to an interest rate (for Universal) or an investment account (for Variable). The benefit of building cash value in the policy is that it allows a policy holder to make a partial withdrawal of the cash value or take a loan against it through the carrier, and in the case of Universal Life policies the accrued cash value can be used to cover the monthly cost of insurance deductions.
Regarding life settlements, many people believe that a Permanent life insurance policy is preferable to a Term life insurance policy as Term policies have no cash value. That actually is not necessarily the case, especially if the term policy is still within the conversion period. Even if the policy is no longer convertible the policy may still be viable so make sure to discuss your case with a licensed life settlement provider or broker before lapsing an unwanted Term life insurance policy.
In some cases, a Term policy may even be more viable for a life settlement than a Permanent life insurance product. For instance, some Permanent types of life insurance like Whole Life are designed to steadily increase in cash value but don’t allow for the accrued cash value to be used to pay for future premium increases. This can make it difficult for a life settlement offer to beat the cash value that has accrued in the policy, in this example.