What Is Permanent Life Insurance? Whole vs Universal vs Term Life

Permanent life insurance is – put simply – a way to combine a death benefit with an interest-bearing savings account. It is permanent because the policy does not have any expiration. But, different types of permanent life insurance offer different benefits and drawbacks. 

Learn everything you need to know about whole and universal life insurance. Find out the pros and cons of the two main types of permanent life coverage. And, see what the big differences are between permanent and term life insurance policies. 

What is Permanent Life Insurance and Should You Get It?

Permanent life insurance refers to two specific forms of permanent life insurance: whole and universal life. Some insurers offer other types of permanent life policies, but whole and universal life are standard permanent life policies offered by any life insurance company. Whole life and universal life insurance are alike in many ways. 

Both types of permanent life insurance policies include a death benefit, as well as a savings element. The difference lies in how the savings aspect, called cash value works with whole vs universal life insurance. Whole life offers a guaranteed-rate savings account, while universal life offers a savings element variable interest rate that is based on the performance of the market.

Permanent Life Policy Basics: Whole vs Universal

The feature indicative of a permanent life insurance policy is the built-in savings element, called cash value. Over time, cash value appreciates as you make regular monthly premium payments on your policy. Your policy’s cash value is tax-deferred and you can borrow against the equity in your policy’s cash value.

The death benefit feature of a permanent life insurance policy is a chunk-sum of money bequeathed to a beneficiary upon the policy holder’s death. The death benefit is separate from the cash value. If you cancel your permanent life policy early, you receive the accrued cash value of your policy, but not the death benefit. How much your policies cash value appreciates over time depends on whether you have a whole life policy or universal life policy. 

Whole life insurance is the most common type of permanent life insurance policy. Whole life policies are popular because they have a guaranteed rate of return. You can be confident that the savings will appreciate over time, which comes at the expense of higher monthly premiums.

Universal life, on the other hand, has lower monthly premiums and offers greater flexibility to increase or decrease the death benefit and premium payments. But, the rate-of-return from savings is not guaranteed, as it is with a whole life policy. Universal life basis the savings aspect in the stock market, which is inherently volatile. 

In bull markets, your universal policy may see a rapid rate of appreciation, and the opposite in a bull market. Since a universal life policy incorporates more variability in your rate of return, it carries the benefit of lower monthly premiums.

Permanent Life vs Term Life Insurance

Another low-premium life insurance option is term life insurance. Term life insurance is the opposite of permanent life, in that the policy will generally expire before the policyholder. Many term life policies include the option to convert it into a permanent life policy – like renting to own. 

The main reason to choose term over permanent life insurance is that term life carries much lower monthly premiums. Finances aside, however, permanent life is a better option for providing savings and, with some policies, dividends after a certain point. Opening a term life policy with the option to convert into a permanent policy can be beneficial for individuals with short-term financial restrictions to opening a new permanent policy.

Permanent life is a tool to provide additional stability to your and your family’s fiscal future. No matter your financial or physical health, there is a life insurance policy that meets your needs. Talk to an insurance specialist for a free consultation on whether term or permanent life insurance is right for you.