Level term life insurance is a type of policy that guarantees your death benefit won’t change and that you pay the same price for your coverage no matter how long it’s active.
This is a great option for people who want to ensure that their loved ones are financially secure when they die.
In this article, we will discuss what level term life insurance is, how it works, if it is worth it, and what alternatives are available.
Term life insurance is a life insurance policy that provides coverage for specific periods, such as 10 or 30 years. Term life has fixed premium rates and a death benefit payout.
Level term life policies work similarly to other types of life insurance. They are contracts between policyholders and insurance companies that financially cover people in the event of their death.
Policyholders pay a monthly premium, and when the policyholder dies, their beneficiaries are paid out a death benefit.
Term life insurance plans only offer coverage for a fixed period while permanent life insurance lasts.
Once a coverage period ends, the contract with the insurance company will be terminated.
Premiums: These are monthly or annual amounts that policyholders pay to insurance companies to keep their coverage.
Death Benefit: This is the amount paid to the beneficiary of an insurance policy after the policyholder’s death.
Beneficiary: A person who receives the death benefit (payout) from a life insurance policy in the event of the policyholder’s death.
The price you pay for level term insurance will depend on the amount of coverage you want and your insurance company. However, most insurance companies will look at the same factors to determine the rate you will pay for coverage.
Premiums for term life insurance are decided based on your:
Other risk factors, like your hobbies and driving record.
Compared to other types of life insurance, level term is usually one of the more affordable options. This makes it ideal for those who are looking for a simple policy that will provide financial protection when they die.
Term life insurance policies provide benefits over a predetermined time period. If a policyholder dies within the duration of the policy, the policyholder's beneficiaries can use the money to pay for funerals, burial plots, housing, and education.
Both level term and decreasing term life insurance provide coverage for a set period of time. However, they differ in key ways.
Level term life insurance offers a fixed level of coverage that remains unchanged over the policy period, while decreasing term life insurance offers decreasing coverage over time as the level premium decreases.
This makes level term life insurance a better option for people who need a fixed amount of coverage. However, decreasing term life insurance may be a more suitable option for those who need shorter-term coverage or for those whose needs change over time.
In most cases, decreasing term policies are less expensive than typical term life insurance. Just keep in mind that both types of policies may be better suited to certain situations and individual circumstances.
If you are unsure about the benefits of various life insurance policies, send your questions to Help@PolicyScout.com or call us at 1-888-912-2132 to get personalized assistance from one of our skilled Medicare consultants.
Predictability: One of the main benefits of level term life insurance is knowing how much your beneficiaries will receive in the payout when you die. As long as you don’t outlive the policy, the predictability of the insurance policy’s payout is certain.
Variety and affordability in choice of coverage: Level term insurance policies are affordable insurance options that offer various coverage time frames to choose from. This helps the policyholder to buy a policy term that best matches their circumstances.
Budgeting: Because level term life insurance offers predictability in terms of benefits and premiums, it becomes easier for the policyholder to plan their financial situation.
The amount that the policyholder will pay for their first year of coverage will be the same amount as they pay for their 20th.
This, in turn, will help the policyholder budget their money knowing that there is a certain amount going towards their level term life insurance.
Good health: Health is often a factor that influences someone’s ability to obtain life insurance or the amount of coverage that the insurance company can offer them.
With term life insurance, if the policyholder is in good health when they buy the insurance, then level term insurance will work in their favor as the coverage won't change for the duration of the policy’s term.
Since they will be paying the same amount and receiving the same coverage throughout the life of the policy, policyholders can get 10, 20, or even more than 30 years of coverage based on their current health.
No cash value: Because there is no cash value component for level term life insurance or any term life insurance, the policyholder will only pay for life insurance protection. This helps makes the policy simple and easy to manage.
Cash value is the portion of your policy that earns interest and may be available for you to withdraw or borrow against in case of an emergency.
Permanent rates: Some may consider the predictability of rates and premiums as a positive. However, for those whose good health gets worse during the term of their policy, permanent rates could be viewed as a disadvantage.
For example, if you lock yourself into a 20-year rate with your current level of health and medical history, you will be required to pay a certain rate.
However, if you end up choosing a more healthy lifestyle (for example you quit smoking or go on a diet), then you may be right in thinking that your policy rates need to change because of this.
Changing financial needs: Another drawback of level term insurance is that your financial needs may change or decline throughout your coverage.
For example, before signing up for a 20-year level term insurance policy, let’s say you calculate that you will need $350,000 worth of coverage to help pay for your car, home, and child’s education in the event of your death.
However, as time goes on, you come to realize that you’ve paid your car off in just five years and that your child will be finished with school in 10 years.
You may then only owe $100,000 on your home, but with your level term insurance policy, you will still be required to pay rates for $350,000 of coverage.
Outliving your first policy: If you manage to outlive your policy’s term and still need life insurance, you will have to buy a new policy.
Because you have outlived your initial policy, you will have aged and perhaps developed a few health conditions. As a result, you may end up paying more for a new policy compared to your first term.
Although level term life insurance is a predictable policy with consistent rates, there are still ways to customize it to be tailored to your exact needs through riders.
A rider is an optional coverage or feature you can add to your life insurance policy, often for an additional cost.
Some of these riders include:
Guaranteed renewability riders: This allows you to renew the policy at the end of the term, on a year-to-year basis.
This is a good option for policyholders who have developed a health condition that would make taking out a new policy unaffordable.
You should also remember that this policy rider will make your level term insurance more expensive.
Waiver of premium riders: This allows you to keep your policy active by paying your rates for you if you become disabled and can’t work.
A term life conversion option: Although this is not an additional rider, it is typically included in term life policies free of charge.
A conversion option allows the policyholder to convert a part or all of their term life policy into permanent life insurance.
After you have signed for your term policy, there is typically a time frame in which you can buy the policy to convert term life to permanent life insurance.
Some companies even offer an “extended conversion” rider that gives you more time to convert your term life policy into a whole life plan.
When you reach the end of your policy’s term, your coverage expires. From there, you have a few choices. These include:
Going without life insurance: You should only do this if you’re able to self-insure and genuinely have no dependents or outstanding debts.
Purchasing a new level term policy: You’ll have to undergo the medical exam again, so while your premiums will be level, they will be more expensive than those of the expired policy.
Converting your term policy into a permanent life insurance policy: Some life insurance plans allow policyholders to convert their term life cover into a whole life policy.
This is a common feature of term policies. A permanent policy will last your entire life but is much more expensive than a term policy.
Level term life insurance may not be the right policy for you, and you may then be looking for different coverage options.
Here are some possible alternatives to level term life insurance:
Annual Renewable Term Life Insurance: This type of life insurance allows you to renew every year. However, your premiums will most likely increase each time. If you do renew the policy, you typically won’t have to reapply or take another medical exam.
Return of Premium Term Life Insurance: This insurance policy also has a term period that will payout of you die within the term. However, if you outlive this policy, the plan will refund you the premiums that you paid throughout.
Guaranteed or Simplified Issue Life Insurance: These policies are typically best for those who require coverage for funeral expenses or who have medical conditions or histories that make other types of insurance hard to buy.
This policy does not require a medical exam to qualify. However, the policy is often very expensive and provides low death benefits, typically between $10,000 and $25,000.
Level term life insurance is a good option for people looking for coverage that is simple and predictable.
If your main concern is stable premiums to help with monthly budgeting, level term life insurance could be a great option for you.
However, if you’re still unsure about level term life insurance or other life insurance term lengths, head to PolicyScout’s life insurance hub.
Our professionals have a variety of articles to help you understand costs, enrollment options, different plans, and coverage for the many different types of life insurance.