What are the different types of permanent life insurance policies?

Permanent life insurance is a type of lifelong coverage that does not expire like term life insurance. Permanent policies also have a cash value savings component that earns tax-deferred interest and can be accessed after holding the policy for a certain period of time. 

But there are several different types of permanent life insurance and the right policy for you depends on your financial and coverage needs. The main difference between each type of policy is how the cash value grows. 

We’ll cover everything you need to know about the most common types of permanent life insurance so you can decide which policy you need.

Whole life insurance

Whole life insurance is the most popular type of permanent life insurance. Cash value accrues interest over time and can be accessed while you’re alive (though sometimes a penalty applies).

The cash value for whole life insurance policies grows at a modest rate, has a guaranteed minimum (or “floor”), and level premiums throughout the life of the policy, meaning the risk for the cash value is minimal.

Whole life insurance features

• Premiums: level

• Death benefit: level; guaranteed minimum

• Cash value: guaranteed

• Growth: predetermined interest rate set by insurer

Universal life insurance

Universal life insurance is more flexible than whole life because you can make changes to both your premium and death benefit. The rate of growth for your cash value, however, is subject to change and is based on an interest rate set by the insurance company (whereas it’s fixed with a whole life policy). There is still a guaranteed death benefit.

Universal life insurance features

• Premiums: flexible

• Death benefit: adjustable; guaranteed minimum

• Cash value: guaranteed minimum

• Growth: based on insurance company's portfolio performance, usually with a minimum interest rate of 1% to 3% set at the time of purchase

Variable life insurance

Variable life insurance has a cash value that grows based on investments in mutual funds offered by your life insurance company. The growth of the cash account correlates to broader market trends, so it’s possible to see faster increases than you’d see with other types of permanent life insurance. 

There is no guaranteed minimum cash value, so if the market fluctuates for the worse, you’d bear the investment risk. The death benefit for variable life insurance can fluctuate over time but still has a guaranteed minimum amount.

Variable life insurance features

• Premiums: level

• Death benefit: variable; guaranteed minimum

• Cash value: not guaranteed

• Growth: subaccounts (pool of investment funds offered by insurer)

Variable universal life insurance

Variable universal life insurance (VUL) combines universal and variable policy features: Your cash value is invested in a fund of your choosing and your premium and death benefit can fluctuate. It is similar to universal life insurance in that it has flexible premiums, but differs in its asset options. With a variable universal life insurance policy, you can choose the assets you invest your premiums in and there is no guaranteed minimum death benefit or guaranteed cash value.

Variable universal life insurance features

• Premiums: flexible

• Death benefit: variable & adjustable; no guaranteed minimum

• Cash value: not guaranteed

• Growth: policyholder chooses assets, similar to an investment account

Indexed universal life insurance

Indexed universal life insurance is a type of universal life insurance with a cash value that changes based on the performance of an investment index, which you choose from a selection offered by your insurer. Gains are tied to the funds you've chosen. Typically there is no guaranteed minimum gain tied to the index funds, but it is guaranteed the cash value will be protected if the index return is negative.

Indexed universal life insurance features

• Premiums: flexible

• Death benefit: adjustable

• Cash value: guaranteed no loss is fund return is negative and capped maximum

• Growth: based on market index performance, such as the S&P 500

Joint life insurance

Joint life insurance covers two people and is most often bought by married couples. It's split into two types: first-to-die, where the policy pays out after one policyholder passes away, or survivorship (also called second-to-die), which pays out after both policyholders pass away.

Joint life insurance features

• Premiums: level

• Death benefit: level; guaranteed minimum

• Cash value: guaranteed

• Growth: predetermined interest rate set by insurer

Final expense life insurance

A less common type of permanent life insurance that does not have a cash value like the others is final expense insurance. This category includes simplified issue and guaranteed issue insurance. These types of permanent life insurance are intended to cover end-of-life expenses or for those who don’t qualify for traditional coverage. Final expense policies only offer low death benefit amounts, up to $50,000.

Pre-need life insurance

Pre-need life insurance is an agreement with a specific funeral home that pays the death benefit to the funeral home to cover your service and burial arrangements, which you make in advance.

Pre-need life insurance features

• Premiums: level

• Death benefit: level; guaranteed minimum

• Cash value: none

• Growth: N/A

Split-dollar life insurance

Split-dollar life insurance isn't a type of permanent life insurance but is an agreement that involves a permanent policy. Two parties, usually an employer and employee, split the ownership and benefits a permanent policy.

Split-dollar life insurance features

• Premiums: level; may be paid by employer

• Death benefit: dependent on policy

• Cash value: dependent on policy; may go to employer

• Growth: dependent on policy chosen

Still not sure which type of permanent life insurance is best suited for your needs? Reach out to a Policygenius agent for free to compare policies and prices across multiple insurers.