Level term life insurance is a type of term life insurance that provides coverage for a specific period, typically 10, 20, or 30 years. The key feature of this type of policy is that the premium payments and death benefit remain the same throughout the policy term, subject to the policy terms and conditions.
What Is Level Term Life Insurance?
Level term life insurance is a type of term life insurance in which the premiums and death benefit are fixed for a specified period.
This means that the policyholder generally pays the same premium throughout the term, while the beneficiaries receive the same predetermined death benefit if the policyholder dies while the policy is in force.
Level term life insurance is sometimes referred to as level premium term insurance or level benefit term insurance.
Level term life insurance provides temporary coverage for a predetermined period. Once the term expires, the policyholder may have the option to renew the policy, depending on the policy contract and insurer's terms, or allow the coverage to end.
If the policyholder dies during the coverage period, the insurer pays the death benefit to the policy's designated beneficiaries.
However, if the policyholder outlives the policy term, the coverage normally ends and the premiums generally are not refunded, unless the policy specifically provides a return-of-premium feature.
What Happens When Level Term Insurance Is Renewed?
Although premiums remain level during the original policy term, the premium may increase when the policy is renewed. This is because the policyholder is older when the new term begins, and the insurer may reassess the cost of coverage according to the policy's renewal terms.
For example, a 20-year level term policy may have a fixed premium throughout those 20 years. If the policyholder renews the policy afterward, the new premium may be higher.
Features of Level Term Life Insurance
The main features of level term life insurance include:
1. Fixed Premiums
Premiums generally remain the same from the beginning to the end of the policy term. This makes it easier for policyholders to plan their finances.
2. Fixed Death Benefit
The death benefit remains unchanged throughout the policy term. If the policyholder dies while the policy is active, the beneficiaries receive the predetermined benefit, subject to the policy's terms and conditions.
3. Premiums Based on Age and Health
The cost of level term life insurance is generally influenced by factors such as the applicant's age, health, lifestyle, coverage amount, and policy term. Older applicants or applicants with certain health risks may pay higher premiums.
4. Renewable
Many level term life insurance policies are renewable after the initial term, although the availability and cost of renewal depend on the policy contract and insurer.
5. No Cash Value
Unlike permanent life insurance, level term life insurance generally does not accumulate cash value. Its primary purpose is to provide a death benefit during the specified coverage period.
6. Temporary Coverage
Level term life insurance provides coverage for a specific period, such as 10, 20, or 30 years. Once the term ends, coverage normally expires unless the policy is renewed or another option applies.
Advantages of Level Term Life Insurance
1. Affordable Coverage
One of the main advantages of level term life insurance is that it is generally more affordable than permanent life insurance.
Because it provides coverage for a limited period and typically does not build cash value, the premiums are often lower than those of permanent life insurance with similar death benefit amounts.
2. Predictable Premiums and Death Benefit
The fixed premium and death benefit make level term life insurance easier to understand and budget for.
For example, if a policyholder purchases a 20-year policy with a fixed premium, they generally know how much they will pay throughout the term and how much their beneficiaries will receive if they die while the policy is active.
3. Simple to Understand
Level term life insurance is relatively straightforward. The policyholder pays premiums for a specified period in exchange for a predetermined death benefit.
4. Useful for Temporary Financial Needs
Level term insurance can be useful for people who want financial protection during important periods, such as while raising children, paying a mortgage, or building retirement savings.
Disadvantages of Level Term Life Insurance
1. Coverage Can Expire
Because level term life insurance provides temporary coverage, the policy may expire while the policyholder is still alive.
If the policyholder outlives the term, the policy generally ends and no death benefit is paid.
2. Usually No Cash Value
Level term life insurance generally does not accumulate cash value. This differs from many permanent life insurance policies, which may provide both a death benefit and a cash-value component.
3. Renewal Can Be More Expensive
Although premiums are fixed during the original term, renewing the policy may result in higher premiums. This is often because the policyholder is older when the new term begins.
Therefore, repeatedly renewing a term life insurance policy can become expensive over time.
4. No Lifetime Coverage
Level term life insurance is designed for temporary protection rather than lifetime coverage. Someone who wants lifelong insurance may need to consider a permanent life insurance policy instead.
Level Term vs. Whole Life Insurance
Whole life insurance is a type of permanent life insurance that generally provides coverage for the policyholder's lifetime, as long as the policy remains in force.
Whole life insurance can provide both a death benefit and cash value, while level term life insurance generally provides a death benefit without a cash-value component.
Other types of permanent life insurance include universal life, indexed universal life, and variable universal life insurance.
The main difference is that level term life insurance provides coverage for a specific period, while whole life insurance is designed to provide lifelong coverage.
Both types can have fixed premiums and a predetermined death benefit, but their costs, coverage periods, and policy features are different.
Level Term vs. Decreasing Term Life Insurance
The main difference between level term life insurance and decreasing term life insurance is how the death benefit changes over time.
With level term life insurance, the death benefit remains the same throughout the policy term.
With decreasing term life insurance, the death benefit gradually decreases during the policy term. Decreasing term insurance is often used to cover debts whose balance decreases over time, such as certain mortgage-related obligations.
Because the coverage amount decreases, decreasing term insurance may be less expensive than a comparable level term policy, although the actual premium depends on the policy and insurer.
Is Level Term Life Insurance Right for You?
Level term life insurance may be suitable for people who want affordable, temporary life insurance coverage with predictable premiums and a fixed death benefit.
For example, a parent may purchase a 20-year level term policy to provide financial protection for their children while they are growing up. Similarly, someone with a long-term financial obligation may use term insurance to provide protection during the period when that obligation is most important.
However, people seeking lifelong coverage or a policy with a cash-value component may want to consider permanent life insurance.
Conclusion
Level term life insurance provides temporary financial protection with generally fixed premiums and a fixed death benefit throughout the policy term. It can be an affordable and straightforward option for people who want life insurance coverage for a specific period.
However, the policy eventually expires if it is not renewed, and it generally does not build cash value. Renewal may also become more expensive as the policyholder gets older.
Before purchasing a policy, it is important to compare the coverage amount, premium, policy term, renewal conditions, exclusions, and other policy features to determine whether level term life insurance meets your financial needs.