Whole life vs. universal life vs. guaranteed universal life insurance

Our comparison guide to three of the most common permanent life insurance types: whole life, universal life, and guaranteed universal life.

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Nupur Gambhir

Nupur Gambhir

Senior Editor & Licensed Life Insurance Expert

Nupur Gambhir is a licensed life, health, and disability insurance expert and a former senior editor at Policygenius. Her insurance expertise has been featured in Bloomberg News, Forbes Advisor, CNET, Fortune, Slate, Real Simple, Lifehacker, The Financial Gym, and the end-of-life planning service Cake.

Updated|4 min read

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Permanent life insurance is an umbrella term for several different subtypes of life insurance. Three of the most commonly bought are whole life insurance, universal life insurance, and guaranteed universal life insurance.

The main difference between the three types is how the cash value component grows in value and what your premiums cover. You may find that you get a better return on investment with different premium structures across the three subtypes.

Key takeaways

  • Whole life insurance is a type of permanent life insurance that lasts your entire life and comes with a cash value component.

  • You can withdraw from the cash value component of a whole policy while you are still alive, though this decreases the death benefit.

  • The cash value of a universal life insurance policy accumulates interest based on the current market rate, which in turn affects how much you pay for your premiums.

  • How much you pay for guaranteed universal life insurance is determined by the interest rate at the time that you signed for your policy.

How the cash value works in permanent life insurance

Whole life insurance and universal life insurance both have a cash-value component. Each month, a certain portion of the premium you pay to keep the policy active goes into a tax-deferred savings account, known as the cash value of the policy. The exact amount that goes into savings is determined by your individual policy. The policy's cash value grows over time.

Each subtype of permanent life insurance offers different features. See the table below for details about how they treat policy lapses, cash-value accumulation, paying premiums, and increasing the death benefit. The rest of this article will go into more detail about each.

Policy featuresPremiums & cash valueWhole life insuranceUniversal life insuranceGuaranteed universal life insurance
No-lapse guarantee.Your policy will be in effect as long as you make premium payments.YesNoYes
Cash-value accumulation.Your policy accumulates a cash value that can be withdrawn or used as a loan.YesYesYes, but lower than other policy types and withdrawing could forfeit guarantee feature.
Paid up at a specific age.You only need to pay premiums up to a certain age.YesNoYes
Benefit amount increases.Your policy's cash-value interest can be added to the death benefit.Yes, with the purchase of a rider.Yes, with choice of this option.No

Whole life insurance

Most people get term life insurance, where you are covered for a set number of years and pay premiums during that time. With whole life insurance, you only have to pay your premiums for a limited time, and in return, you get coverage for life. Your beneficiaries are guaranteed to receive a death benefit when you die.

The cash-value component of a whole life insurance policy pays out dividends, although they’re not guaranteed. The dividends are reinvested back into the cash value, essentially paying for an increase in the death benefit if you don’t use the cash value while alive. This gives whole life insurance a “no-lapse,” in that as long you or your policy’s cash value is paying your premiums, your coverage won’t expire.

Whole life insurance premiums are paid either until a certain age or for a set number of years, and your rate will be affected by the option you choose. However, once you lock in that rate, it will be the same throughout the whole time you pay premiums.

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Universal life insurance

Universal life insurance was created at a time when interest rates were much higher than they are today. The idea behind universal life is that their cash-value component accumulates interest at a rate tied to market indexes.

When rates were high, this made a lot of sense – you pay lower premiums to get the same amount of cash value or slightly better. However, if the interest rate goes down, your premiums could go up as the life insurance company has to put more money in to maintain the policy’s cash-value component. That means people who took out universal life insurance coverage in the 1980s and 1990s, when interest rates hit their peak, saw their premiums gradually increase and potentially become unaffordable.

Like whole life insurance, if you stop paying your premiums, the death benefit will be supported by the cash-value component. But this reduces the death benefit and could completely deplete it if you don’t resume paying your premiums. While life insurance is generally used as a hedge against risk – if you die when the policy is in force, your beneficiaries get a death benefit – universal life insurance potentially increases your risk.

Guaranteed universal life insurance

Guaranteed universal life insurance is like universal life insurance but removes the market risk aspect of it. Your premiums stay the same regardless of how market indexes perform as your plan’s interest rates are baked into the premiums when you sign up for the policy. This type of life insurance has a “no-lapse” guarantee, meaning that as long as you pay your premiums, you’ll have coverage.

This also means, however, that your policy may not have any cash value at all. There’s nothing to support the death benefit if you stop paying your premiums, although as long as you keep up to date, the death benefit also won’t decrease, as happens with universal life insurance.

In that way, guaranteed universal life insurance most closely resembles term life insurance. Term life insurance only covers you for a set number of years, usually 20 or 30. You pay your premiums for that time and get coverage only for that time, unless you stop paying your premiums. At the end of the term, you are no longer covered, but you also are probably close to retirement and don’t need as much coverage anyway.

Frequently Asked Questions

What is whole life insurance?

Whole life insurance is a type of permanent life insurance with a cash value that grows tax-free over time.

What is universal life insurance?

Universal life insurance is a type of permanent life insurance where you can use the cash value growth to pay your policy's premiums.

What is guaranteed universal life insurance?

Guaranteed universal life insurance is a type of universal life insurance that has a no-lapse guarantee.