Level Term Life Insurance Explained
B.A. Risk Management
Life Insurance Agent
If you're looking for an affordable and straightforward life insurance policy to protect you and your family, level term life insurance may be exactly what you need.
What is level term life insurance?
Level term life insurance is a term life insurance policy in which the premium and death benefit remain the same throughout the life of the policy. Most term life policies are level term.
Benefits of level term life insurance
The premium stays the same for the entire time that you own the policy. People seeking a fixed expense they can budget for will go with a level term life insurance policy. By law, even if you have a significant health issue that comes up, such as a heart attack, cancer, or other serious condition, your costs for the premium will not go up.
The death benefit stays the same for the entire time you own the policy. Insurers are obligated to provide you coverage until the end of your contract. The only time the death benefit can change is if you agree to a reduction in the death benefit because you want to reduce your premium payment or if there is a rider that allows you to increase the death benefit in exchange for a higher premium.
The policy is only in effect for a predetermined amount of time. Life insurance companies offer level term policies for as little as five years or as many as 30 or 40 years. The longer the policy length, the more expensive the premium is because the risk of an insured person passing away while the policy is in effect increases over time.
Overall, level term is a relatively cheap form of life insurance. If you are younger and just starting out, or if your finances are tight because you’re right in the middle of raising a family, a level term life insurance policy can save you money in the long run while still providing critical life insurance coverage.
What is the difference between a level term and a whole life insurance policy?
The main difference is duration. Level term policies expire after a certain agreed-upon amount of time, anywhere from five to 40 years. Whole life insurance policies can last for your entire life, as long as you continue to pay premiums.
Whole life policies also have a cash component. This means they acquire cash value over time, which is a type of investment you can borrow against or use to pay policy premiums in the future. Level premium term life insurance does not have this option. For a whole life policy, understand that if you do take a loan out and die before it’s repaid, the death benefit may be used to pay back the loan, so your beneficiaries won’t get the full whole life policy amount.
With a whole life policy, you can surrender your policy at any time and receive cash. With level term life insurance, if you surrender the policy, you get no money back. Also, level term policies are not participating policies, meaning that you don't get any dividend payments like you do with a whole life policy.
For these reasons, one of the other key differences is that whole life insurance is a lot more expensive than level term life insurance. This can be a limiting factor because people may not be able to afford enough coverage based on what they need.
In some cases, insurers allow level term life insurance policyholders to convert to a whole life policy if there is a term conversion rider in place.
What happens to a level term policy at the end of the term?
When your level term life insurance policy reaches the end of the agreed-upon term, one of several things can happen:
You can purchase a new level term policy. You will have to undergo medical underwriting in most cases, and your policy premium will be higher than the last policy you had. You do have the option to take out a policy for lower face value as a way to save on premium costs.
You can convert your term policy to a permanent whole life policy. That is common, but again, your premium costs will be more. The trade-off is that you will have coverage for life if you want it, and you will have the opportunity to start accumulating cash value as part of your investment portfolio.
You can choose to go without coverage. This might be an option if you’ve accumulated sufficient resources so that you can self-insure.
Advantages and disadvantages of level term life insurance
- Predictable premium costs for the life of the policy.
- Death benefits stay the same for the life of the policy.
- It is a very straightforward type of policy. You are simply exchanging premium costs for a specified time and amount of coverage.
- It’s generally the most affordable form of coverage.
- It makes great sense when you want to provide protection during a specific time in your life when you have certain obligations. That might include ensuring that your children's college expenses are protected, or that your mortgage will be paid for if you die.
- The length of the policy is flexible to address the changing needs of your life.
- There is no cash value component. If you surrender the policy early, you do not get any money back. Also, you can't take a loan out against the policy.
- You will not receive dividend payouts like you would with some other types of insurance policies.
- You can't increase the face amount of the policy unless you have a guaranteed insurability rider in place that expressly allows you to increase coverage.
- When the policy expires, it will cost you more to execute a new life insurance policy.
Should you buy a level term life insurance policy?
You need to determine what your needs, wants, and goals are in your life and how life insurance can provide you with the right kind of peace of mind for you and your family.
For many people, especially those just starting out, level term life insurance is an affordable way to protect your family. Others will want the benefits that a whole life policy can provide and go that route instead.
Before you decide, the best thing to do is to talk to a licensed and experienced life insurance agent about your situation. A good agent will not only be able to advise you but also help you with a cost comparison and what levels of coverage make the most sense now and in the future.