Understanding the Different Types of Permanent Life Insurance

Breaking down the differences between Whole Life, Universal Life and Variable Universal Life Insurance

Permanent Life Insurance is a term that is used to describe policies that do not expire. There are two main types of permanent life insurance: Whole Life and Universal Life.

The biggest benefit to permanent life insurance is the death benefit does not go away after a period of time. This is perfect for protecting needs like Final Expenses, Long Term Care (when a LTC rider is added), or estate planning. Many permanent policies also include some kind of cash value that can be used, when necessary, as a living benefit.

Whole Life vs. Universal Life

What is Whole Life Insurance?

Whole Life Policies are popular because they are very easy to understand and fully guaranteed. Whole Life policies are great for covering final expenses or other needs that require a smaller death benefit. With most Whole Life policies, the premium & death benefit stay exactly the same for the life of the policy. The Cash Value is fully guaranteed and illustrated at the time of quoting.

The downside to Whole Life: Because the insurance carrier is offering so many guarantees, this is generally an expensive type of policy, premiums are fixed which also means they cannot ever decrease, also if you ever need to access the cash value in a Whole Life policy it almost always comes out as a loan.

Noteworthy Item: 20 Pay Whole Life Policies are great for kids. A 20 Pay Whole Life policy means the policy is paid for 20 years, after that the policy is fully paid and remains in effect for the rest of the insureds life. Since the premiums are so inexpensive on children, you can often get them a policy that is fully paid by the time they are in their 20’s but stays with them forever at a very inexpensive rate.

What is Universal Life Insurance?

Universal Life Policies are popular because they offer a lot more flexibility than Whole Life policies, while still offering a permanent death benefit. The most important principal to understand with Universal Life is that the Cash Value drives the entire policy. There is a minimum cost to the policy every year known as the Cost of Insurance (COI). Premium payments in excess of the COI grow tax free within the policy as the Cash Value.

With Indexed Universal Life Insurance the policy’s cash value grows or shrinks with the stock market

The most popular type of Universal Life policies these days is an Indexed Universal Life (IUL). With an IUL the Cash Value grows (or shrinks) indexed with the stock market. The Cash Value at the time of original illustration generally looks like a bell curve, meaning you pay more than the COI in early years and less in later years to hopefully create a policy with a level premium.

Because the cash value is not fully guaranteed, Universal Life policies are generally less expensive than Whole Life Policies. This makes Universal Life policies a great fit for things like Long Term Care planning, estate planning or any other permanent protection that requires a larger death benefit.

Other Benefits of Universal Life Insurance

Payment flexibility – Depending on how your cash value is performing, Universal Life policies offer the ability to make flexible premium payments. If your cash value is doing well, you may be able to pay less premium without impacting your policy. The other side of that is if your cash value is not doing as well as proposed, you could end up paying more than expected.

Pro Tip – at the time of quoting / illustration it’s important to understand how aggressive the rate of return on your Cash Value is. Most advisors have gotten more conservative with their estimates, so your premium doesn’t go up unexpectedly.

Universal life policies got a bad rep in the late 80’s and early 90’s because they were often illustrated too aggressively. Those policies were commonly based on interest rates (not the stock market), and illustrated with interest rate so high that we haven’t seen anything close to those rates since then. If you have a Universal Life policies purchased in that time frame, we highly recommending completing a life insurance review ASAP as your policy man be in danger of “exploding”.

Withdraw or Loan – With permanent policy you have the ability to withdraw or borrow from the cash value. This can be a very nice living benefit. We however believe it should be viewed as an ancillary part of the policy. If you do borrow from your policies cash value and do not pay the loan back, your death benefit will be reduced by the amount of that loan plus interest.

What is Variable Universal Life Insurance?

This is another option in the Universal Life Umbrella. Your cash value is invested directly in a fund or stock (instead of an entire market like the Indexed Universal Life). This makes it a higher risk policy since your investment is less diversified.

It is important to review your life insurance policy with your agent regularly to make sure that it is offering you the best level of protection for your current situation.

Final Thoughts

Permanent Life insurance (just like any other insurance) should be fit to your needs. Policies can be very exotic or very simple. Talk with your advisor and find a policy that best suits your needs. Make sure to review your permanent life insurance policy, with your advisor, every few years to ensure its protecting you and performing the way you need it to.