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Life Insurance 101
November 3, 2014 | Chris Kissell; excerpted from Thrivent magazine
Difference between term insurance & permanent insurance
Life insurance can help provide for your loved ones by replacing your income, paying expenses and passing on a memorable legacy for the future.
There are two basic types of life insurance: term and permanent. Term insurance is just like it sounds: you buy term life insurance for a certain period of time – often for 10, 20 or 30 years – and if you die within that time frame, a death benefit is paid out to your beneficiary.
As you might guess from the name, permanent life insurance is permanent as long as the contract is in good standing. (That's where the name comes from: permanent = will be in place as long as the payments are made, until you die, versus term = in place for a set period of time.)
What are the benefits of one versus the other? How do you know which one you need? Read on for an overview and things to think about.
|Budget-friendly: You'll get the most insurance coverage for the least amount of premium. Rates will remain the same during the length (term) of the contract you selected.||Predictable: With traditional whole life insurance, the premium will never change, no matter how long you have the insurance. With other types of permanent contracts, you may be able to plan scheduled premiums, allowing you to budget accordingly. Buying it when you are young generally means you'll have lower premiums.|
|Deliberate: For when you need to cover a known expense (like a mortgage) that your beneficiary would need help with, if you die while the contract is in force.||Flexible: Can be used to cover immediate needs at death, like paying off a mortgage, as well as longer-term needs, like being a source of retirement income.1|
|Short-term: While most contracts start at 10 years, if you cancel the contract earlier you do not pay any penalties.||Cash options: A portion of each premium goes toward the costs/expenses of the insurance contract, and a portion becomes part of the cash value. You may be able to tap into the cash value as the amount builds – either directly or through a loan.1|
|Breaks down barriers: Some term contracts allow you to convert to permanent insurance without having to go through another health exam.||Expandable: You can increase or decrease the amount (for some types of contracts).|
Which insurance is right for you?
Can't decide which one is best for you? The right insurance depends on your goals and circumstances, which will likely change over time. It might not even be an either/or decision. There are times when it makes sense to buy both types of contracts.
In fact, life insurance can be a flexible financial tool. Different types and combinations can meet a wide range of needs. Talk to a Thrivent Financial representative to figure out which one – or both – should be a part of your financial strategy.
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1 Loans and surrenders will decrease the death proceeds and the value available to pay insurance costs which may cause the contract to terminate without value. Surrenders may generate an income tax liability and charges may apply. A significant taxable event can occur if a contract terminates with outstanding debt. Contact your tax advisor for further details. Loaned values may accumulate at a lower rate than unloaned values.