Permanent life insurance is an umbrella term for several different types of life insurance policies that never expire. Three of the most commonly bought are whole life insurance, universal life insurance, and guaranteed universal life insurance.
All three policy types come with a cash value savings component in addition to the standard death benefit that traditional policies pay out to the beneficiaries when the policyholder dies. The main difference between them is how that cash value grows in value and what the policy’s premiums cover.
What is whole life insurance?
Whole life insurance is a type of permanent life insurance that never expires and comes with a cash value that earns interest at a rate set by your insurer. You’ll pay level premiums for the lifetime of the policy (in other words, they won’t change).
Whole life insurance can be a good fit for people with either long-term financial obligations who want a guaranteed savings vehicle, or people who are looking to use life insurance to diversify their investment portfolio. Or, if you’re looking to offset estate tax, whole life provides a guaranteed death benefit as long as you pay your premiums to keep the policy active.
→ Read more about the cost of whole life insurance
What is universal life insurance?
Universal life insurance has a cash value component that accumulates interest at a rate tied to the current market, with a minimum interest rate. After building enough cash value, you can use those funds to pay your premiums, which makes this type of policy unique. You can benefit from flexible premiums, but you may also have to pay more for your policy as time goes on.
Because of the risk associated with changing interest rates, universal policies are usually best for high-net-worth individuals with specific tax or investment needs. If you’re already maximizing contributions to tax-advantaged accounts like a Roth IRA or 401(k) and willing to take on more investment risk, universal life insurance might work for you.
What is guaranteed universal life insurance?
Guaranteed universal life insurance (GUL) is one of the most affordable forms of permanent life insurance. You’ll pay fixed premiums regardless of how market indexes perform since your plan’s interest rates are factored into the premiums when you sign up for the policy. This type of life insurance builds very little cash value, but has a no-lapse guarantee, meaning that as long as you pay your premiums, you’ll have coverage.
If building cash value isn’t a main priority of yours and you’d rather have a guaranteed, permanent death benefit, GUL might work for you.
How the cash value works in whole life vs. universal 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 — and how it grows — is determined by your individual policy and policy type.
Each type 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.
Comparing whole life vs. universal life vs. guaranteed universal life insurance
Policy feature | What it means | Whole life insurance | Universal life insurance | Guaranteed universal life insurance |
|---|---|---|---|---|
No-lapse guarantee | Your policy will be in effect as long as you make premium payments | Yes | No | Yes |
Cash-value accumulation | Your policy accumulates a cash value that can be withdrawn or used as a loan | Yes | Yes | Yes, 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 | Yes | No | Yes |
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 |
Which costs more, whole life insurance or universal life insurance?
Whole life insurance typically costs more because it comes with a guaranteed death benefit and a fixed interest rate — so the policyholder takes on less investment risk.
Since a standard universal life insurance policy has flexible premiums, rates depend on the terms of the policy and the choices made by the policyholder. Universal life insurance rates typically increase as time goes on, so initially, you might pay rates that resemble those in the GUL column below ($100 to $200 per month for $500,000 worth of coverage), but those premiums could double or triple over the course of the policy. If you want to have a close estimate of how much universal life insurance policy costs, it’s best to connect with a licensed agent.
Guaranteed universal life insurance, on the other hand, has fixed premiums, so it’s simple to figure out how much you’d pay month over month. Below is a comparison of whole life insurance rates versus guaranteed universal life insurance rates.
Monthly rates for a $500,000 whole life insurance policy vs. a $500,000 guaranteed universal life insurance policy
Age | Sex | $500,000 whole life insurance policy | $500,000 guaranteed universal life insurance policy |
25 | Female | $346 | $113 |
Male | $393 | $134 | |
35 | Female | $481 | $171 |
Male | $571 | $198 | |
45 | Female | $716 | $273 |
Male | $866 | $312 | |
55 | Female | $1,173 | $446 |
Male | $1,380 | $506 |
Methodology: Sample monthly rates are calculated for male and female non-smokers in a Preferred Plus health classification obtaining a $500,000 cash value whole life insurance policy from MassMutual and a $500,000 guaranteed universal life insurance policy through Pacific Life. Rates may vary by insurer, term, coverage amount, health class, and state. Not all policies in all states. Rate illustration valid as of 02/06/2023.
Which is better: whole life or universal life insurance?
Deciding which permanent life insurance product is best for you will depend on your specific financial goals and circumstances.
If your goal is to guarantee an inheritance for your beneficiaries or pay off estate tax, for example, whole life insurance may be a fit for you.
If you’d prefer to have flexible premiums and you have a higher degree of risk tolerance, universal life insurance may be a better fit.
If you’re not as interested in cash value accumulation but want to guarantee a death benefit for a dependent, guaranteed universal life insurance may be a good option for you.
On the other hand, if your primary goal is to protect your income during your peak earning years and provide a financial safety net for your family, you may not need permanent life insurance coverage at all — a term life insurance policy may work better for you instead. Term life insurance is one of the most affordable policy options, lasts only as long as you need it, and comes with few tax restrictions or limitations.
No matter your circumstances, it’s important to discuss with a financial advisor and insurance professional before purchasing a permanent life insurance policy. Premiums can be steep and you can face surrender fees if you decide you can’t keep the policy beyond a few years.
