Although the term “whole life insurance” is often used synonymously with permanent life insurance, whole life, universal life, and variable life are actually types of permanent life insurance. Other permanent life insurance policies are a variation of these three products.
Permanent life insurance never expires and has a cash value component in addition to the death benefit. You can take a loan on the cash value or use it as collateral during your lifetime. This is why permanent life insurance is considerably more expensive than term life insurance.
Quick tip: All permanent life insurance policies have a death benefit in addition to cash value. The difference is how the cash value is managed: insurance company portfolio, stocks, or options.
What is universal life insurance?
Universal life is a type of permanent life insurance.
Permanent life insurance lasts until you die, or an average of 110 years, which is why it’s more expensive in the early years of the policy. The older you get it, the less expensive it becomes, according to Mark Williams, CEO of Brokers International.
Universal life insurance was created in the 1980s when interest rates were high. Like whole life, universal life’s cash value is invested in the insurance company’s portfolio.
Unlike whole life insurance, universal life’s cash value earns interest based on current money market rates, but interest rates fluctuate with the market. Because it’s based on interest rates, there will be varying returns and costs. Allstate has a helpful universal life policy return calculator.
Universal life insurance gives you the flexibility to increase or decrease your death benefit. If you lose your job, you can call the insurance company to decrease your death benefit so your payment can go down. It also gives you the ability to change your death benefit if your circumstances change.
There are different types of permanent life insurance, but they all have death benefits as well as a cash value that grows on a tax-deferred basis. The big difference between the types of permanent life insurance policies is how they manage the cash value.
| Types of permanent life insurance | Best for | Where is the cash value invested |
| Whole Life | Guaranteeing exact same premium for the life of the policy | In your insurance company’s portfolio |
| Universal Life | The flexibility to change your premium, death benefit, and cash value over time | In your insurance company’s portfolio |
| Guaranteed Universal Life | Flexibility of a universal life policy with guaranteed rates of whole life | In your insurance company’s portfolio |
| Indexed Universal Life | Like universal life instead of interest rates in fixed indexed market | Fixed index stocks and options |
| Variable Life | Investing your cash value in the stock market rather than your insurance company | Stock market |
| Variable Universal Life | The flexibility to change your death benefit, investing in the stock market rather than your insurance company | Stock market |
You can add riders to your universal life insurance policy. All types of permanent life insurance, including universal life, offer riders that can be added to the policy.
Riders include:
1. Waiver of premium: Allows you to pause your premium payments if you are sick, hurt, or disabled
2. Long-term care: Lets you use the policy’s death benefit toward assisted living during your lifetime (such as in-home care or a nursing facility)
3. Family rider: Puts the entire family under one policy
Every rider is an additional cost that increases the premium on your policy, but it’s better than having multiple policies. Williams noted that riders vary depending on the insurance company, and that you must buy riders up front.
How to use life insurance cash value
You can use the cash value of a permanent life insurance policy during your lifetime, for things such as paying your children’s college tuition, funding a business, or purchasing a second home. Most people use the cash value to fund their retirement — paying themselves a monthly income when they stop working. Due to these features, permanent life insurance can function as an investment and wealth-building tool.
If you decide you don’t want your permanent life insurance policy anymore, you get the cash value back. However, Williams warned that because the money inside the policy has been growing on a tax-deferred basis, you will pay taxes on it.
If you cash the policy in, Williams continued, there’s no more death benefit; you are literally canceling policy. This is also known as cash value surrender — giving up a permanent life insurance policy that has cash value.
Quick Tip: Before purchasing a life insurance policy, speak with a financial advisor — and your accountant — to make sure it’s providing the benefits and coverage you need.
Who needs universal life insurance?
Think of permanent life insurance coverage like equity in a home. You may not be able to get your dream home right off the bat, but you can get a starter home that also builds you wealth. With permanent life insurance, you can start with a smaller death benefit and increase it over time. And if you can’t afford a permanent life insurance policy, get a term life policy that can be converted to a permanent policy.
Williams also suggests a combination of permanent and term life insurance. For example, if you have $200,000 in permanent life and $300,000 in term for 20 years, at the end of 20 years the term life insurance policy goes away but you still have your $200,000 permanent policy that has earned cash value.
If you’re considering universal life insurance, it’s wise to consult an accountant and financial advisor to determine which policy is best for you and advise you of the tax benefits and implications. It’s worth taking the time to find the best policy for you, because once you’ve signed on the dotted line, it’s a lot more difficult to make changes if you need to adjust your coverage.
Ronda is an attorney, writer, and entrepreneur. She is a contributing writer for the Huffington Post. Originally from Chicago, she has lived in Los Angeles and New York. She loves to travel and is passionate about education equity, especially for first generation college students.