There are two types of life insurance: permanent life and term life. Term life insurance only lasts for a specific timeframe. 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.
Although whole life insurance is 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.
The big difference between the types of permanent life insurance policies is how they manage the cash value.
What is 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 policy, but the older you get it becomes less expensive.
“In the early years of overpayment, the cash value put inside the policy earns interest and you use that bucket of money to offset the cost of insurance when you’re older,” said Mark Williams, CEO of Brokers International.
You can also use the cash value of permanent life insurance to borrow against 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.
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.
Types of permanent life insurance policies
There are three main types of permanent life insurance: whole life, universal life, and variable life. All other permanent life insurance policies are based on a combination or mix of the main three.
The major 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 |
Additionally, there are riders that can be added to these permanent life insurance policies. Some riders include: waiver of premium if you are sick, hurt, or disabled; long-term care for assisted living, in-home or nursing facility; and a family rider, which puts the entire family under one policy.
Every rider is an additional cost that increases the premium on your permanent life insurance policy, but it’s better than having multiple policies. Williams noted that the price for riders vary depending on the insurance company, and that you must buy riders up front.
Whole vs. universal vs. guaranteed universal life insurance
| Whole Life | Universal Life | Guaranteed Universal Life (GUL) |
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Whole life stands out from other types of permanent life insurance because it guarantees the exact same payment for the life of the policy. The insurance company invests your money (your insurance premium) within its own portfolio. Many whole life insurance policies also let you increase the death benefit over time.
Meanwhile, universal life insurance’s cash value is based on interest rates. If interest rates go down, you can pay more in premiums. Universal life insurance also allows you flexibility to raise or lower your death benefit. Because it’s based on interest rates, there will be varying returns and costs. Allstate has a helpful universal life policy return calculator.
Guaranteed universal life, also referred to as GUL, is a mix of whole life and universal life. Guaranteed universal life gives the guaranteed premium of a whole life policy, but has the flexibility of a universal life policy. Guaranteed life policies don’t have the same cash value growth rate as whole life policies, which makes them less expensive.
According to Northwestern Mutual, “While many guaranteed universal life insurance policies feature a cash value component, it won’t match the guaranteed cash value growth rate in a whole life policy…because guaranteed universal life insurance is designed to be a lower-cost option to provide a lifetime death benefit rather than cash value growth.”
How much does permanent life insurance cost?
Permanent life insurance is considerably more expensive than term life insurance because of the cash value aspect of this kind of policy, and because the policy never expires.
Because guaranteed universal life’s cash value doesn’t grow at the same rate as a whole life insurance policy, it will be less expensive than whole life. The growth rate selected for the cash value will factor in the premium cost.
Who needs permanent life insurance?
Permanent life insurance is like homeownership with equity. You may not be able to get your dream home, but you can get a starter home that also gains equity. For permanent life insurance, start with a smaller death benefit and increase it over time. If you can’t afford a permanent 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 permanent life insurance, it’s wise to consult an accountant and financial advisor to determine which policy is best for you and 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.