Our comparison guide to three of the most common permanent life insurance types: whole life, universal life, and guaranteed universal life.
Permanent life insurance offers coverage that does not expire, provided you paid your premiums on time. Permanent life insurance, like other kinds of life insurance, protects your family from the risk of financial difficulty should you die an untimely death. But while term life insurance only lasts for a specified time period – the term – permanent life insurance lasts until you die.
Permanent life insurance is actually an umbrella term for several different subtypes of life insurance. Three of the most common are whole life insurance, universal life insurance, and guaranteed universal life insurance. Each one lasts until you die; two of them also have a cash-value component that gains interest and helps support or even increase the death benefit. As with other types of life insurance, you keep your permanent life insurance in force by paying monthly or annual premiums.
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.
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Each subtype of permanent life insurance offers different features. See the table below for the features of each. The rest of this article will go into more detail about each.
|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|Cash-value accumulation.||Your policy accumulates a cash value that can be withdrawn or used as a loan.||Yes||Yes||No|
|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||No||No|
Whole life insurance and universal life insurance have a cash-value component that grows in value with each premium payment you make. Eventually, the amount of the cash-value component will replace that of the death benefit. If you die with your life insurance policy intact, your beneficiaries will receive a payout that comprises the value of the whole policy as a function of the cash value and the promised death benefit.
As long as you’re paid up on your premiums, you can redeem a dollar amount from the cash-value component. Doing so, however, will diminish your policy’s death benefit, sometimes by an amount greater than the cash you redeemed. The cash-value component also isn’t a very strong investment, regardless of whether you have a whole life, universal life, or guaranteed universal life insurance policy.
The cash-value component supports the death benefit as long as you keep paying your premiums. But if you neglect to pay your premiums yourself, your policy will be kept in force by the cash-value component, gradually depleting it until the policy lapses entirely.
Most people get term life insurance, where you get life insurance for a predetermined 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.
Because you pay for the whole life policy with after-tax dollars, you can withdraw from the cash value tax-free when you retire. By then, you’ll have less of a need for a large death benefit anyway, as you’ll have fewer dependents or other people who rely on you financially.
If you do decide to draw on the cash value, you may have to pay taxes on it, but if your premiums are all paid up, you won’t pay a surrender charge.
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.
A whole life policy you take out at age 30 and for which you have to pay premiums until age 65 costs on average about $122 per month. It’s lower -- $99 per month – if you go with a plan that requires you to pay premiums until age 99. So-called “10 Pay” and “20 Pay” whole life policies where you pay premiums for 10 or 20 years, respectively, cost a 30-year-old on average $239 per month for the 10-year payment plan and $145 per month for the 20-year payment plan. But at the end of each payment period, you have coverage for the rest of your life.
Universal life insurance was created at a time when interest rates were much higher than they are today. The idea behind them is that their cash-value component accumulates interest at a rate tied to market indexes.
The interest goes toward reducing your premiums, with the excess amount, after funding the cash-value and the carrier’s take, going to a modest increase in the growth of the cash value.
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.
For that reason, universal life insurance is less expensive than whole life insurance. A 30-year-old may pay on average about $42 per month in premiums as an initial rate, but the rate will almost certainly fluctuate.
Guaranteed universal life insurance takes the concept of 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.
Guaranteed universal life insurance is for people who do need that coverage later in life. In that sense, guaranteed universal life insurance is like a term life insurance policy where the term lasts the rest of your life. On average, a 30-year-old applicant can expect to pay $54 per month for coverage.
The following tables are average rates for different types of the permanent life insurance subtypes covered in this article based on policies purchased from Policygenius.
Disclaimer: Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.