Permanent life insurance policies, often called “whole life” insurance policies as a general term, are life insurance plans that are structured to last for a person’s entire life.
This sets them apart from term life policies, which offer coverage that is designed to insure your income earning years and end naturally when the term is over.
There are many types of permanent life insurance, each with different benefits and drawbacks. However, there are a few common factors that differentiate most permanent and term life plans.
|Differences Between Permanent and Term Life|
|Permanent Life||Term Life|
|Lasts your entire life||Lasts for a set amount of time|
|Typically 10-12x more expensive than term||Relatively inexpensive|
|Meant to guarantee money for end-of-life or retirement planning||Meant to replace a provider's income after an unexpected tragedy|
|Some policies offer death benefits that can increase over time||Guaranteed fixed death benefit|
|Some policies allow payment flexibility and the ability to take loans out of your coverage||Guaranteed fixed payments|
» Learn more: Term vs. Whole Life Insurance
Here, we’ll discuss the basics of the four most common permanent life insurance options our clients choose: Whole Life, Guaranteed Universal Life, Universal Life, and Indexed Universal Life.
Permanent life insurance policies are structured to last for a person’s entire life.
Whole Life insurance
Most life insurance customers think of all permanent life insurance policies as “Whole Life.” However, in life insurance lingo, that’s actually the technical name for a specific type of permanent insurance policy.
Whole life insurance is, in general, the most comprehensive and fully featured type of coverage. This means that it typically has the highest premiums as well.
Because of this, life insurance advisors sometimes refer to whole life as the highest cost, highest reward path for permanent coverage.
A whole life policy typically has the following features:
- Dividend Paying
- Guaranteed for Life
- Policy Loan Options
Many whole life policies also offer level premium payments, meaning that your price won’t rise year over year, but this isn’t true for every whole life plan on the market.
Many types of permanent life insurance policies increase in value over time based on interest rates. A policy that pays dividends is able to increase in value above and beyond the interest that other types of permanent life insurance policies accumulate.
A policy’s dividend is the profit that your life insurance policy brings in based on the premium that you put into it. You can use these dividends to increase your life insurance protection or reduce your out-of-pocket premiums, or you can simply take them in cash.
For example, a $50,000 whole life plan could grow to provide a death benefit of over $100,000 over the course of 30 or 40 years if it is allowed to keep growing in value.
Because dividends allow your policy to grow in value, it’s possible to use that value growth to pay your premiums. Some policies allow you to reduce or even completely stop your regular premium payments by putting your dividends towards your policy’s premium payments.
Guaranteed for Life
This means that your rates and coverage will be locked in until an age that most of us probably aren’t going to live to see (this age is often 120, but some carriers have variations on this). However, you don’t lose your policy if you manage to reach the carrier’s guaranteed age limit.
When you reach the end date of a permanent life insurance policy, the policy “matures.” The maturity clause of a life insurance policy is fairly complicated, but this basically means that the value you would be able to keep by surrendering the policy becomes larger than the total death benefit.
At this point, the carrier will give you a lump sum payment equal to your total death benefit and end your policy. You can think of this as getting your death benefit early, but with a few strings attached. Talk to your agent to learn more about mature policies, as the fine print varies from carrier to carrier.
Policy Loan Options
Policy Loans are exactly what they sound like. A whole life policy increases in value based on your regular payments and the dividends that it accumulates.
Using the policy’s cash value as collateral, the policy’s owner can take out a tax-advantaged loan from the insurance carrier. Many whole life policyowners use these loans to supplement their income after retirement.
An important thing to consider, however, is that a policy loan is still a loan. Unless the value that you withdraw is paid back to the insurance carrier before your death, the balance of your loan will be deducted from the death benefit, and the carrier will need you to repay the interest on the loan as well.
This fact makes policy loans just as risky as bank loans if you aren’t 100% sure about your repayment strategy. Using policy loans without a solid grasp of how their interest is calculated can result in losing most – or all – of your death benefit. You can even owe money above and beyond your policy’s cost if you let the interest get out of hand.
Policy loans can be an excellent supplement to retirement income if used and planned for properly. Always talk to a financial advisor if you’d like to explore using policy loans on a whole life insurance plan, and check up on your policy loans regularly to make sure that your financial strategy is still on track.
Guaranteed Universal Life
A Guaranteed Universal Life (GUL) policy is arguably the simplest type of permanent life insurance. It functions almost exactly like a term life insurance plan, except that you can dial in a term length to meet your permanent life insurance needs.
When you buy a GUL plan, you get a policy with a set face amount and regular payment. As long as you continue to pay the premium on time, your rate and death benefit are locked in and guaranteed to stay the same.
The guaranteed portion of a GUL policy comes from the guaranteed premium and death benefit. Other Universal Life plans can see costs rise throughout the duration of the policy because of possible changes in interest rates or costs of insurance, but a GUL policy will always be the same premium cost for each payment.
This does mean that GUL policies are fairly limited in terms of how you pay for them because policy loans or late premium payments can nullify the guarantees.
Compared to term life insurance, GUL policies have a higher premium because they cover a longer period of time. However, compared to other whole life plans, GUL policies are often relatively inexpensive. Additionally, the consistent prices make a GUL plan far easier to budget for in the long run.
Universal Life (UL) insurance is another common type of permanent life insurance. It trades some of the value growth benefits of a whole life insurance policy in exchange for more flexible payment plans and a lower price.
Basically, a universal life insurance policy is a plan that offers the same death benefit as a whole life plan, but with a very flexible payment structure. The policy is paid for and kept active by drawing on the cash value for its premium payments, not directly by regular premium payments.
This means that you are able to pay a single premium or a limited number of payments to pay for your policy rather than making ongoing payments every month or year.
As long as there’s enough cash value to keep the policy afloat, premium payments can be reduced or even stopped completely. Some people who own UL policies purchase them as plans they can pay for up front and just keep an eye on in the future.
However, while a whole life policy offers dividends that can grow above and beyond a normal interest rate, a universal life policy will only pay a set amount of interest each year. This means that between a UL policy and a whole life policy purchased at the same time, the whole life policy will often grow faster and offer a greater death benefit.
Additionally, the price for a standard UL policy can increase as you age if the illustrated interest rates drop or the internal cost of insurance increases.
Indexed Universal Life
An Indexed Universal Life (IUL) insurance policy functions similarly to a standard universal life policy, except that it accumulates value through investments in a stock market index rather than the typical low-risk investments that most dividend-paying policies use to grow.
With an IUL, you are basically participating in a stock market index, but with a maximum and minimum percentage on your return.
The benefit of using an IUL policy as opposed to simply investing in an index yourself is that there is a guaranteed 0% floor for your investment risk. If the stock market doesn’t perform well, your policy won’t lose value, it just won’t grow.
The downside is that if you purchase your IUL in a strong market, the policy actually caps the amount of money it can accumulate—typically at around 10%-15%.
Like other UL policies, an IUL policy offers a high degree of flexibility and customization and accumulates tax-free value above and beyond its initial face amount. It also has the potential to out-earn other policies in the long term.
However, like anything tied to the stock market, its growth isn’t something you can count on 100%. Because the price isn’t guaranteed, there is the possibility that a long streak of poor market activity could raise your premium and make your policy become unaffordable.
Whether you’re looking for permanent life insurance or decide that you’d like term life insurance, we’re ready to help.
If you’d like to purchase a permanent life insurance plan, our advisors can help you make the right decision for your family. Since permanent insurance plans are so specialized, there isn’t a one-size-fits-all option, so we don’t run quick quotes for these plans online.
Instead, we have in-house whole life experts you can schedule a free phone consultation with. This lets us understand your needs and goals so we can give you an informed recommendation. The phone call is absolutely free, and there’s no commitment to buy.
About the writer
Eric moved from sales to communications at Quotacy. His writing is informed by his experience guiding hundreds of people through their own life insurance buying journey. Eric lives in Minneapolis, where his coworkers are trying to convince him to start his own podcast, do stand-up, or take his humor into the spotlight. Connect with him on LinkedIn.