When it comes to choosing a life insurance policy, most people consider the choice between term and whole life. Term life insurance covers you for a specific length of time, like 10 or 20 years, as long as you pay your monthly premium. Whole life insurance is more expensive (especially in the early years), but provides lifelong coverage and the peace of mind that security comes with.

However, if you choose whole life insurance, you still have some further decisions to make. Whole life insurance is actually part of the permanent life insurance family, a type of coverage that provides benefits for life in a variety of ways. For example, whole life and guaranteed life insurance may sound the same, but there are certain differences that those looking for coverage need to be aware of. Term life policies are straightforward and easy to understand. Permanent life policies require a little more reading of fine print.

How Does Whole Life Insurance Work?

Whole life insurance is a hybrid between insurance and investment. Unlike term life insurance, whole life policies cover the participant for life and pay out a guaranteed cash benefit to loved ones upon death. The premium for these policies is expensive but it is guaranteed not to increase over the term of the policy.

Additionally, whole life insurance policies have a cash value which can be drawn upon later. This gives whole life policy purchasers a little bit of flexibility when it comes to the cash value they’ve been accumulating. If an unexpected expense occurs (or maybe even a change of heart on a home remodel or dream vacation) some of the cash value can be borrowed against or surrendered. Whole life policies can also pay dividends if the insurer’s portfolio performs well, and the death benefit can be increased over time.

How Does Guaranteed Life Insurance Work?

Universal life insurance is a variable rate policy based on current interest rates. Your premiums are cheaper than Whole Life Insurance, but they can increase if interest rates decline and decrease if interest rates rise. Guess what’s been happening for the last 40 years? Declining interest rates have made universal life policies less popular, despite being cheaper than whole life.

Guaranteed life insurance is a variation of universal life that removes the interest rate variable from the equation. If whole life is a hybrid of insurance and investment, then guaranteed life insurance is a hybrid of whole life and universal life. You’ll get affordable premiums like you would with universal life policies, but also the security of guaranteed rates and lifelong coverage of whole life insurance.

Guaranteed life insurance doesn’t technically provide lifetime coverage as you’ll need to pick a term between 90 and 121 years. Picking the 90 year option will cost less, but you run the risk of outliving your coverage if you’re lucky enough to see your 90th birthday. Guaranteed life policies have a minimal cash value since premiums are lower, but the death benefit due to loved ones is still guaranteed.

Whole Life vs Guaranteed Life Insurance: Which Works Best For You?

Whole life insurance provides the most protection and is popular amongst high net worth individuals who want security, an accumulating cash value, and tax benefits for their capital. Because of this guarantee of security, as well as the flexibility to tap the account for cash, whole life policies are the most expensive form of life insurance.

On the other hand, guaranteed life insurance offers much more affordable premiums and you can select a term out to your 121st birthday. So unless you plan on making an appearance in the Guinness Book of World Records, you won’t have to worry about outliving your coverage. You’ll get guaranteed premiums for the length of the policy and your loved ones will be assured of a death benefit upon your passing. However, the cash value of these policies is minimal and you won’t have the cash out flexibility of whole life insurance.

Which policy is best? It depends on how much you want to balance cost and security. Term life insurance is the cheapest option, but there’s no cash value and there is a high risk of outliving the coverage. Whole life provides the most security and capital flexibility, but at the highest cost. If you’re looking for a middle ground between term life and whole life, guaranteed life insurance could be an option. You’ll lock in the cost of your premiums and guarantee your loved ones are taken care of.

Work With an Experienced Financial Advisor

Regardless of which route you take, always consult with a financial advisor before purchasing life insurance policies. Purchasing the wrong type of coverage can be an expensive mistake. Our knowledgeable financial advisors at Good Life Financial Advisors of Mt. Pleasant can provide the tools and guidance to help you plan your estate’s finances for your family’s future. Contact us today to speak to our experts.

Disclosures

This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. Guarantees are based on the claims paying ability of the issuing company.