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Author: Ryan Patterson

What's the Difference Between Permanent and Whole Life Insurance?

Whole life insurance is a type of permanent insurance, and both of these have terms lasting until the end of the insured's life, as opposed to term life insurance, which, as the name suggests, only covers the life of the insured for a specified term. Put simply, permanent life insurance always pays out to the beneficiary, because the end of its term is the death of the insured; term life insurance only pays out if the insured dies during the allotted time period. The former is substantially—sometimes tenfold—more expensive than the latter, but term life insurance renewal is often costly, since at the end of the term the insured person is older and therefore represents a higher risk. This is especially true of life insurance for seniors, as one might imagine, since their chances of payout are higher.

Whole life insurance, also known as cash surrender life insurance, is considered a solid investment. Given consistent upkeep, it accumulates value on a tax-deferred basis, just as an education or retirement fund does. With whole life insurance, the insured may use the policy as collateral, borrow against it or even borrow from it—again, just as with a bank account. If the insured borrows from it, say to build a dream retirement home, the end cash payout obviously will be lower for the named beneficiary/ies, unless the borrowed amount is repaid. And, if the insured is unable to continue paying into the policy, then just like a bank account, it might still have a payout to beneficiaries, depending on when the payout is. The insurance company providing whole life insurance also folds its dividends directly into the policy (provided the company is profitable), providing a secondary increase in value over time.

Another type of permanent insurance is variable life insurance. Here, the life insurance policy is more of a stock portfolio than a savings account, and its value varies with the value of the investments chosen to support it. At the end of the insured's life, the portfolio is paid out to the beneficiary/ies; depending on the risk level of the chosen investments, the benefit may either erode or grow over time.

With universal life insurance, the insured pays a base initial amount, and then makes payments within a range set by the insurance provider. This type of policy is usually less costly, but it is important to understand that the range of minimum and maximum payments may change over time, depending on the health of the provider, its investments or other terms. Therefore, the account requires more attention than other forms of permanent insurance.

Finally, variable universal life (VUL) insurance is another tax-free account in which terms and payments can vary as needed. In it, flexible premiums may be invested in a variety of areas and accounts, coverage may be increased or decreased, and investments may be transferred between accounts without tax ramifications. Because the policyholder retains more of the risk than the insurance provider, VUL policies often have less costly upkeep fees than many other types of policies. On the other hand, it is also a combination of all of the flexibility possible within the permanent life insurance category.

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