There are 3 main types of permanent life insurance, and they each grow value differently

Personal Finance Insider writes about products, strategies, and tips to help you make smart decisions with your money. We may receive a small commission from our partners, like American Express, but our reporting and recommendations are always independent and objective.

  • All permanent life insurance lasts forever and has a cash value, but there are three main varieties.
  • Whole life insurance has a guaranteed premium rate over the lifetime of the policy. 
  • Universal life insurance lets you change the death benefit, while guaranteed universal is a combination of whole and universal.
  • Policygenius can help you compare life insurance policies to find the right coverage for you, at the right price »

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 is actually a type 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 insuranceBest forWhere is money invested?
Whole lifeGuaranteeing exact same premium for the life of the policyIn your insurance company’s portfolio
Universal lifeThe flexibility to change your premium, death benefit, and cash value over timeIn your insurance company’s portfolio
Guaranteed UniversalFlexibility of a universal life policy with guaranteed rates of whole lifeIn your insurance company’s portfolio
Indexed UniversalLike universal life instead of interest rates in fixed indexed marketFixed index stocks and options
Variable lifeInvesting your cash value in the stock market rather than your insurance companyStock market
Variable universal lifeThe flexibility to change your death benefit, investing in the stock market rather than your insurance companyStock 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 insuranceUniversal life insuranceGuaranteed universal life (GUL)
  • Guaranteed premium 
  • Can increase death benefits over time
  • Premiums are expensive
  • Cash value is based on interest rates
  • Flexibility to increase or decrease death benefit 
  • Premium depends on interest rates
  • A hybrid of whole and universal life 
  • Guaranteed premium
  • Flexibilty to increase or decrease death benefit
  • Cheaper than whole life because cash value doesn’t grow at same rate

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. 

Here’s how much a whole life insurance policy would cost per month at various ages, for both $25,000 in coverage and $50,000 in coverage.

Age$25K whole life insurance monthly premium$50K whole life insurance monthly premium
30-year-old female$23$38
30-year-old male$27$47
35-year-old female$26$46
35-year-old male$31$55
40-year-old female$31$56
40-year-old male$38$68
45-year-old female$38$69
45-year-old male$47$83
50-year-old female$46$85
50-year-old male$59$106

Data from

Below are price ranges for a universal life insurance policy worth $250,000 for a healthy nonsmoker.

Age$250k universal life insurance monthly premium
25-35 female$54-$83
25-35 male$63-$103
35-45 female$83-$130
35-45 male$103-$150
45-55 female$130-$207
45-55 male$150-$244
55-65 female$207-$337
55-65 male$244-$427

Data from SmartAsset

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?

High-net-worth wealth individuals — those with at least $1 million in liquid assets — typically have permanent life policies for tax benefits, endowments, and gifts. The cost is considerably more than term life insurance because it is a wealth-building tool. A permanent life policy is the best option if you anticipate needing more insurance as you age, since you’ll be able to add riders without needing multiple policies.

The average person may not be able to afford a $1 million permanent life insurance policy. Permanent life insurance is like home ownership 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 Lee is an associate editor for insurance at Personal Finance Insider covering life, auto, homeowners, and renters insurance for consumers. She is also a licensed attorney who practiced litigation and insurance defense.

Disclosure: This post is brought to you by the Personal Finance Insider team. We occasionally highlight financial products and services that can help you make smarter decisions with your money. We do not give investment advice or encourage you to adopt a certain investment strategy. What you decide to do with your money is up to you. If you take action based on one of our recommendations, we get a small share of the revenue from our commerce partners. This does not influence whether we feature a financial product or service. We operate independently from our advertising sales team.

Source: Read Full Article