What Is Level Term Life Insurance?
- Learn what level term life insurance is and how it works. Find out how it compares to other types of term life so you can make an informed buying decision.
Term life insurance offers an affordable way to ensure that your loved ones will remain financially secure if you die. With term life, you pay monthly premiums for a set time period in exchange for an insurance company's promise to pay your beneficiaries a benefit in the event of your death. Insurance companies offer many types of term life. Level term life is a popular option due to its many benefits. Understanding what it is and how it works can help you decide if level term life insurance is right for you.
What Is Level Term Life Insurance?
With level term life insurance, your beneficiaries receive the same death benefit no matter when you die, provided the coverage hasn't expired. Whether you die within the first few months or the last day of the term, the death benefit paid out by the insurance company is the same.
What Does Level Mean in Level Term Life Insurance?
The word level in the phrase level term life insurance means fixed or the same. It refers to the fact that the death benefit is a preset amount that's not affected by how far into the term a claim is made.
Is Level Premium Life Insurance the Same as Level Term?
Level premium life insurance is not the same as level term. With level premium life insurance, the amount that you pay monthly to maintain insurance coverage stays the same throughout the entire term of the policy. Level term refers to the death benefit, not the premium.
Often, life insurance policies that have a level term also have a level premium. As a result, some people use the name level term to refer to both types of life insurance. However, not all level term policies have fixed premiums, making it important that you read the policy information carefully before you buy.
What Happens at the End of a Level Term Life Insurance Policy?
At the end of a level term life insurance policy, your coverage expires. If you want to continue having the benefits of coverage, you'll usually need to take out a new term life insurance policy. You may have to undergo a medical exam, and the premiums that you'll pay for the same death benefit may go up due to your increased age or any changes in your health. If you've developed a serious health condition that greatly increases your risk of death, you may be denied coverage.
Some level term life insurance policies are renewable. With this type of life insurance, you're guaranteed to be able to renew your policy at the end of the term without having to undergo a medical exam for underwriting. Your premium may go up each time you renew. This type of insurance may be costlier than a standard level term policy.
The Benefits of Level Term Insurance
Some of the benefits of level term life insurance include:
- Peace of mind. With level term life insurance, you can rest assured that your loved ones will receive a set amount of money if you die before your policy expires.
- Future-proofing. A level term life insurance policy can help you take advantage of your current age and health status. Younger, healthier people tend to pay less for life insurance. If you take out a level term life insurance policy now, your loved ones will be guaranteed a set death benefit during the entire term even if you develop a serious health condition.
- Easier budgeting. If you choose a level term life policy with a level premium, you can easily anticipate how much you'll need to pay for life insurance each month over time.
When Is Level Term Life Insurance Not the Best Choice?
Despite its many benefits, level term life insurance isn't ideal for everyone. You may wish to choose another type of life insurance if one or more of the following are true.
Your Current Health Isn't Optimal
If you smoke, are overweight or need to undergo a medical procedure to improve your health, you may be locked into a high premium to receive a death benefit large enough to suit your needs. Taking out a one-year term life insurance policy may be more cost-effective. Once your health improves, you can apply for a level term policy and lock in a better rate.
You're on the Verge of Financial Changes
Most people's life insurance needs decrease over time. As you pay off your mortgage, watch your children become financially independent adults and accumulate a savings, you're likely to need less life insurance. If you anticipate major financial changes taking place soon, a level term life insurance policy could leave you over-insured.
Decreasing term life insurance may make more sense under these circumstances. With this type of policy, your death benefit decreases according to a set schedule, and your premiums are lowered accordingly to save you money.
You Want a More Flexible Long-Term Solution
If you want to account for changes in your financial obligations upfront, purchasing one level term life insurance policy is less than ideal. Instead, you could create a life insurance ladder. With this type of arrangement, you purchase multiple level term life insurance policies with varying terms. For example, you might buy one of each of the following:
- 10-year $100,000 level term life insurance policy
- 20-year $50,000 level term life insurance policy
- 30-year $20,000 level term life insurance policy
For the first 10 years, you'd have $170,000 of life insurance for your beneficiaries. From years 11 to 20, your total death benefit would be $70,000, and starting in the 21st year, your coverage would drop to $20,000. The terms on each policy would remain level, but your total insurance coverage would change as you get older.