The difference between whole life, universal life, and guaranteed life insurance




There are two types of life insurance: permanent life and term life. Term life insurance is only good for a set period of time. Permanent life insurance has a cash value component in addition to the death payout and never expires.


Although the terms "whole life insurance" and "permanent life insurance" are sometimes used interchangeably, whole life, universal life, and guaranteed universal life are all types of permanent life insurance. The major difference between the types of permanent life insurance policies is how they manage the cash value.


What these insurances are known for:


Whole Life

  • Guaranteeing exact same premium for the life of the policy

  • Can increase death benefit over time

  • Premiums are expensive

Universal Life

  • The flexibility to change your premium, death benefit, and cash value over time

  • Cash value is based on interest rates

  • Premium depends on interest rates

Guaranteed Universal

  • Flexibility of a universal life policy with guaranteed rates of whole life

  • Guaranteed premium

  • Flexibility to increase or decrease death benefit

  • Cheaper than whole life because cash value doesn't grow at same rate

Whole life insurance differs from other types of permanent life insurance in that it ensures the same payment throughout the policy's life. Your money (your insurance premium) is invested by the insurance company in its own portfolio. Many whole life insurance policies allow you to gradually boost your death benefit.


Meanwhile, the cash value of universal life insurance is determined by interest rates. If interest rates fall, you will be able to pay more premiums. You can also increase or decrease your death benefit with universal life insurance. Because it is reliant on interest rates, the returns and costs will change.


GUL (guaranteed universal life) is a combination of whole life and universal life. Guaranteed universal life combines the security of a whole life policy with the versatility of a universal life policy. Guaranteed life insurance policies have a lower cash value growth rate than whole life insurance, making 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.


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.

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