How does permanent life insurance work?

Life insurance is a financial safety net that protects you and your loved ones. Once you've determined how much life insurance you need, you should weigh the pros and cons of different policy types. This article covers the key benefits of permanent life insurance, introducing the different kinds available so you can decide if it's the right fit for you.

Permanent life insurance offers lifetime coverage that provides a cash payout to your beneficiaries when you die. It also has a savings component to help you manage your own financial needs while you're alive. Unlike term life insurance, which only lasts for a set number of years, permanent coverage stays in force for as long as you pay the premiums and the contract is in good standing.

Part of each premium you pay helps cover the cost of providing a death benefit to named beneficiaries. Another portion of your payment helps fund the cash value in your contract. The cash value component accumulates tax-deferred savings and may earn interest or dividends depending on the policy type. Need to borrow money for an emergency or supplement retirement income? Cash value can offer flexibility when life throws you a curveball.

Permanent life insurance may be something you want to consider if, for example:

• You have lifelong financial dependents, such as a child with special needs or a spouse who will need support.
• You've maxed out your 401(k) or IRA and are looking for an additional way to build tax-advantaged savings.
• You want to help your beneficiaries cover estate taxes so they don't need to quickly sell off other assets.
• You worry about your family's ability to pay final expenses, like a burial and funeral, and want a tool that helps cover those costs.

If you're looking for lifelong coverage and added financial flexibility, permanent life insurance is worth considering.

While permanent life insurance may not be the right answer for everyone, it's a versatile option that gives long-term financial protection to your loved ones and adds stability to a financial plan. Here are some key features:

Most perm life insurance policies will pay a death benefit to your beneficiary regardless of when you die, as long as your contract remains in force. If you have a family history of early death or a hereditary disease, permanent coverage can allow you to lock in your coverage before it could become harder for you to obtain life insurance.

Permanent life insurance covers the financial needs your loved ones may face after you die by paying out a lump sum. They can use the death benefit, which is usually income tax-free, to pay for final expenses, manage bills or replace your income when you're gone. This can be especially reassuring if you're in a season of life where the loss of your income would significantly impact your family. For example, if you're the sole provider for your family, a lump-sum death benefit would help alleviate the financial burden while your spouse adjusts to new responsibilities.

Part of your premium goes into a cash value account that grows tax-deferred over time. You can borrow against the cash value, withdraw from it or even surrender your contract—often without triggering taxes. This can be helpful in times of critical need, such as making major home repairs or supporting a child while they get on their feet. Keep in mind, though, that any withdrawals or loans that you don't pay back reduce your cash value as well as the death benefit that's available to your beneficiaries.

Many permanent contracts lock in your premium amount, so it doesn't increase as you age—even if your health worsens later in life. This prevents you from dealing with price hikes as you get older or experience more significant health conditions down the road.

Your employer may offer term life insurance as part of your benefits package. But unlike that coverage, a separate permanent life insurance contract will continue to safeguard your family even if you switch jobs. Even if you plan to be with your current employer until retirement, unexpected market turns and changes in the company's stability can affect your job security. Having permanent life insurance on top of your employer-sponsored coverage can ensure your family will be provided for, even if the worst happens between jobs.

The main difference between term life and permanent life is the coverage period. Term life insurance covers you for a set period of time, typically between 10 and 30 years, while permanent coverage can last your entire lifetime. Term options also don't offer a cash value component.

Term life can be a budget-friendly choice because it's usually less expensive than permanent insurance for the same death benefit. Having term insurance can give you flexibility if you want to change your contract to have enough life insurance coverage at different points in your life.

For example, a married couple with two young children could take out a 10-year term contract—offering extra protection during a season when they pay daycare costs or a spouse temporarily leaves the workforce—while simultaneously owning a 30-year contract that provides more long-term security.

But term life insurance lacks key benefits that permanent insurance offers. With a permanent option, you won't have to worry about losing your death benefit on a predetermined expiration date, and you may be able to take advantage of cash value.

If you're looking for an additional tax-deferred savings option or have unique estate planning needs, permanent insurance might be a more logical choice.

Permanent life insurance comes in a few varieties with differences in how the contract works, what you pay and how much control you have over the investment of the cash value. Understanding the trade-offs between whole life, universal life and variable universal life can help you pick the right solution for your long-term goals.

Whole life insurance is the most straightforward type of permanent life insurance, offering fixed premiums for your entire lifetime. It also provides a guaranteed death benefit and a cash value component that grows at a set rate.

What makes it different:

• Guaranteed level premiums
• Guaranteed death benefit (as long as premiums are paid)
• Cash value growth that isn't subject to market risk
• The potential to receive dividends (with certain contracts)

The simplicity of whole life insurance can be an attractive feature if you want stable coverage and guaranteed growth. But other types may work better if you want to actively manage your policy or aim for higher cash value returns.

The primary benefit of universal life insurance is flexibility. Unlike whole life, which locks in a set premium and death benefit, universal life lets you adjust both over time. You can increase coverage when you need more protection—or lower it later to save on premiums.

Universal life insurance contracts also allow you to build cash value. But instead of growing at a fixed rate, the savings vehicle in your contract earns interest based on current market rates (though there's usually a minimum guaranteed rate). Depending on the amount of cash value in your policy, you can pay a bit more for your coverage when you can or less when your budget is a little tighter. These qualities can make universal life an attractive choice if you want lifelong coverage with a little more versatility.

What makes it different:

• Flexible timing and premiums, if you have sufficient cash value in your contract
• Adjustable death benefit while the contract is active
• No guaranteed death benefit if you stop paying premiums or deplete the cash value
• Thrivent's universal life insurance has a minimum credited rate, meaning your cash value grows no matter what the financial markets are doing.

Like universal insurance, variable universal products allow you to adapt the coverage to your evolving needs. You can pay more when you want to boost your cash value or pay less if there's enough cash value to cover the contract's costs.

The main difference is that variable universal allows you to invest your cash value in investment subaccounts. That means the growth is tied to market performance—and is subject to its fluctuations. You're increasing the growth potential of your contract, but also assuming the risk that your contract could lose value, or even terminate, amid a downturn.

What makes it different:

• You get flexible premiums over time, if you have enough cash value.
• Contract returns are based on investment choices.
• A market downturn can shrink your cash value, which may force you to increase your premiums to keep the contract from lapsing.
• You often pay higher premiums, including investment fees, compared to universal life products.

Life is complicated. Over the years, you may find that your insurance needs change because of dependents, debts, career changes and your overall financial goals. If you have term life insurance but want permanent coverage, you have a few options to explore:

One consideration to weigh if you're leaning toward permanent life insurance is that some term contracts allow you to convert to permanent coverage. This could allow you to extend your protection, typically without having to undergo a new medical exam. There's usually a deadline—for example, you often have to convert within the first few years and before you reach a certain age—so you'll want to review the details of your contract.

If your term contract doesn't offer conversion, or the window has passed, you can apply for a new permanent life insurance contract. You'll go through underwriting again, so your current health and age will affect your rates. Once approved, however, your health status won't affect the amount you pay for your permanent contract going forward.

You may decide that blending life insurance is what works for you. You can keep your term coverage and buy a smaller permanent contract to build lifelong coverage over time. For instance, you may want term coverage to provide extra protection during a period when your family has more budget constraints, but have permanent coverage that can help pay final expenses and other costs when you pass away.

Additionally, Thrivent's whole life plus term protection life insurance offers lifetime protection through a combination of whole life and term insurance. It's a cost-effective way to get the maximum death benefit at an affordable premium.

Term life insurance can be a compelling option if you're on a tight budget and primarily seek a financial safety net for your loved ones. But permanent coverage offers advantages you won't find with a term contract, like lifelong protection and the ability to grow cash value on a tax-deferred basis.

Eager to learn more? A Thrivent financial advisor can help you decide whether permanent life insurance is a good fit and explain which type of lifelong coverage is best for your unique needs.