Term vs. permanent life insurance: Which is right for you?

Securing your family's finances to prepare for whatever the future brings is one of the cornerstones of responsible planning. Life insurance plays a critical role in that plan, providing a safety net for your loved ones in case something happens to you.

As you consider your insurance options, you'll inevitably reach a fork in the road: whether to get term or permanent coverage. Understanding how they compare in cost, versatility and long-term value can help you choose the right protection for you and your family.

Term life insurance provides straightforward coverage. If you die while the contract is in place, the beneficiaries you have named will receive a tax-free death benefit. This payout can help them manage final arrangements, pay down debts or replace your lost income.

While term life can serve as a valuable safety net for your family or business, it's only active for a limited time, usually between 10 and 30 years. If you die after the term has expired, your beneficiaries are no longer eligible to receive a payout from the insurer.

Permanent life insurance also provides your beneficiaries with a death benefit, but two key features make it different from term insurance. First, it provides coverage through your lifetime as long as you continue to pay the premiums. Second, it has a savings component that grows over time, which makes it a versatile financial asset you can use for a wide range of needs down the road.

When you purchase a permanent life insurance contract, part of your premium payment funds the policy's death benefit, and another part helps build cash value that you can tap into during your own lifetime. This cash balance can be used for anything from college tuition to retirement income. Permanent life insurance cash value grows on a tax-deferred basis, and your withdrawals may be income tax-free.

Types of permanent life insurance include:

• Whole life insurance. Whole life insurance pays a guaranteed interest rate on your cash value (in addition to a guaranteed death benefit), which is based on market conditions when you take out the contract. Some contracts also provide a dividend.
• Universal life insurance. These contracts offer a guaranteed minimum interest rate on your cash value and provide greater flexibility than whole life insurance. You have the freedom to adjust your premium payments—and in some cases, the death benefit—as your needs change.
• Variable universal life insurance. Variable universal life insurance also offers flexible premiums, but the rate credited to your cash balance is based on the performance of stock and bond investment funds. That means you have higher growth potential than other permanent contracts, but you accept greater risk.

Term and permanent life insurance both provide valuable protection for the people you love, but they're designed to serve different roles. Understanding how they compare can help you choose the coverage that best fits your financial needs in the future.

Permanent life insurance lasts your entire life as long as premiums are paid and the contract retains its value. With term life insurance, your contract is only active for a specific length of time. Many term life insurance products have a convertibility feature that allows you to switch all or part of your contract to permanent life insurance. Generally, you don't need a medical exam to demonstrate your insurability—you're placed in the same risk class you were assigned when your first took out coverage. However, your premium likely will increase.

Term coverage is often called "pure" life insurance because its sole purpose is to safeguard your family or business if you die while the contract is active. Permanent life insurance also protects your financial dependents, but it allows you to build cash value that you can access while you're living. Generally, you can access your cash value balance in these ways:

• Withdrawal. You take money from the cash balance.
• Loan. You borrow money from the cash balance with the intent to repay.
• Surrender. You receive the entire cash balance, but the contract is no longer in effect.
• Premium payments. You use the cash balance to pay for the contract.

Many people appreciate term life insurance because it's generally the most affordable way to protect loved ones who depend on your income. It's a sound choice if you don't necessarily need the additional features of permanent life insurance.

The premiums for permanent life insurance tend to be higher than the initial cost of term life contracts with the same death benefit. However, your coverage could last longer, and part of your premium helps grow your cash value.

No life insurance product is one-size-fits-all. Choosing the right one depends on your situation and goals. As you consider which type of life insurance to purchase, here are some of the main benefits and drawbacks to consider:

Choosing a life insurance product should ultimately come down to your budget and financial goals based on the amount of coverage you need. Here are some common scenarios that may reflect your situation:

If you're just starting a family, your foremost objective usually is shielding your spouse and children so they're financially secure if something happens to you. Both term and permanent insurance can provide the protection your loved ones need. But if you're on a tight budget, term insurance typically provides a solid amount of coverage with a relatively modest premium that even most younger families can afford.

As your earnings grow, you can gradually increase the amount you save for long-term needs through separate investment accounts like 401(k)s and 529 college plans.

For families with a bit more disposable income, a permanent life insurance product can provide a financial cushion for your family when you die while also allowing you to save for your own future expenses.

Because cash-value contracts come in a variety of forms, you can choose the product that best meets your needs.

For example, whole life can make sense if you're looking for predictable costs and a guaranteed return in any market conditions. If your income isn't always predictable, however, you may want to consider a universal life contract that allows you to change your premiums over time.

If you're planning to pass along a sizable estate, permanent life insurance is typically the best way to protect your heirs. Here, the contract's ability to grow cash value is usually secondary to its ability to transfer a reliable death benefit—a factor that usually makes whole life or universal life insurance a solid choice.

If your assets are large enough to trigger state or federal taxes when you die, you may want to think about putting the contract in an irrevocable life insurance trust, which is excluded from your taxable estate. An estate planning attorney can work with your insurance professional to develop a wealth-transfer strategy and calculate a death benefit amount that fits your family's or business's needs.

Permanent life insurance premiums are generally five to 15 times more expensive than term contracts with the same death benefit. That makes them less ideal if you're on a budget or simply want to protect your family for a certain period of time.

However, the cash value you accumulate over the years—and the lifetime protection permanent life provides—can make the higher initial costs a smart trade-off in many situations.

Let's take a hypothetical example of two $500,000 contracts owned by a 35-year-old male—one with a 30-year term and one whole life. The numbers are illustrative only, but they give a realistic look at how the two products might stack up:

• Monthly premium: $40
• Coverage length: 30 years
• Cash value: $0

By year 30, the man has paid $14,400, but his coverage would be ending with no continuing benefits. He would need to either renew his contract or purchase a new one, likely at a much higher premium.

• Monthly premium: $500
• Coverage length: Lifetime
• Cash value: Grows over the life of the contract

By year 30, the man has paid $180,000, and his cash value could potentially be anywhere from $90,000-$170,000, reflecting a reasonable internal rate of return of 2%-4%. Actual cash value depends on many factors, including contract terms, dividends, and loans or withdrawals. His contract also stays in force with the same premium amounts, even if his health worsens, for his lifetime.

Buying term life insurance can be a great way to get robust coverage that won't break the bank. But if you can afford the premiums and want lifelong protection that can also help you build long-term wealth, the versatility of permanent insurance might be what you're after. A Thrivent financial advisor can help you compare your options and find the solution that best fits your needs.