Table of Contents
Table of Contents
Level term life insurance is one of the most common types of protection. You may know it by a different name — term life insurance. While the names often are used interchangeably, level term coverage has some important distinctions: the premium and death benefit stay the same for the duration of coverage.
As you explore options for life insurance, here's what to know about level term coverage, including benefits, drawbacks and why it may be an option to consider.
What Is Level Term Life Insurance?
Level term is a life insurance policy where the life insurance premium and death benefit remain the same for the duration of coverage. That means the death benefit payout doesn't change regardless of when you die. These policies can last for a 10-year term, 15-year term, 20-year term or 30-year term. The length of your coverage period may depend on your age, where you are in your career and if you have any dependents.
Like other types of life insurance coverage, a level term policy provides your beneficiaries with a death benefit that's paid out if you pass away during your coverage period. However, level term policies don't build cash value over time. That typically makes them a more affordable option for life insurance coverage.
Some term policies may not keep the premium and death benefit the same over time. You don't want to mistakenly think you're buying level term coverage and then have your death benefit change later on.
How Does Level Term Life Insurance Work?
Many people get life insurance coverage to help financially protect their loved ones in case of their unexpected death. Life insurance helps provide your loved ones with a measure of financial stability by replacing some or all of your income and generating money to pay the bills.
The process of buying a level term life insurance policy is similar to other types of coverage. Steps may include:
- Deciding how much coverage and the term length you need. You can often buy a level term policy that covers 10, 15, 20 or 30 years.
- Filling out your application and completing a questionnaire covering your health history, work and financial information. You may also need to take a quick medical exam, depending on the coverage.
- Getting approved for coverage and paying your premiums. With level term coverage, your premiums never change.
If you pass away while your coverage is in effect and your premiums are up to date, your beneficiaries may be eligible to receive your death benefit payout. If you outlive your policy once the term expires, your coverage ends. Once your coverage ends, you may purchase another life insurance policy. Or you may have the option to convert your existing term coverage into a permanent policy that lasts the rest of your life.
What Are the Potential Benefits of Level Term Life Insurance?
Various life insurance policies have potential benefits and drawbacks, so it's important to understand each before you decide to purchase a policy. There are several benefits of term life insurance, making it a popular choice for coverage.
These include:
- It's simple to understand: Level term life coverage is straightforward: it's there for as long as you determine you need it. As long as you pay the premium, your beneficiaries will receive the death benefit if you die while covered. That said, it's important to note that most policies are contestable for two years which means coverage could be rescinded on death, should a misrepresentation be found in the app. Policies that are not contestable often have a graded death benefit.
- It's typically affordable: Unlike permanent coverage, level term policies are designed to be more affordable. Premiums are generally lower than whole life policies.
- It's often flexible: With a level term policy, you can choose your coverage amount and the policy length. You're not locked into a contract for the rest of your life.
- The coverage stays the same. Throughout your policy, you never have to worry about the premium or death benefit amounts changing. That makes planning and budgeting easier.
What Are the Potential Drawbacks of Level Term Life Insurance?
While level term coverage has potential benefits, there are some key drawbacks as well. Considering them can help determine if it's right for you and your family, or if a different policy fits better.
Some drawbacks include:
- Coverage has an end date: While you can choose the term, it means the policy will expire at some point. You may then have to purchase a new policy, which could be more expensive, depending on your needs and health.
- It has no cash value: Some permanent life insurance policies allow you to build a cash value, which can grow tax-deferred, providing another way to save. Level term policies lack this feature.
- Premiums tie to your health: Healthier people tend to get a better rate. But you can possibly get a rate reconsideration if you've improved your lifestyle and are in better health later in your policy.
- You won't get premiums back: If you outlive your policy, you won't get any premiums back. And you can't cash out your policy during its term, so you won't receive any financial benefit from your past coverage.
How Much Does Level Term Life Insurance Cost?
As with other types of life insurance, the cost of a level term policy depends on your age, coverage needs, employment, lifestyle and health. Typically, you'll find more affordable coverage if you're younger, healthier and less risky to insure.
Generally, level term life insurance rates are less than comparable whole life coverage.
Since level term premiums stay the same for the duration of coverage, you'll know exactly how much you'll pay each time. That can be a big help when budgeting your expenses.
How to Customize Your Level Term Life Insurance Policy
Level term coverage also has some flexibility, allowing you to customize your policy with additional features. These often come in the form of riders. A life insurance rider can add optional coverage features to your policy that your standard policy doesn't cover, usually for a supplemental cost.
Here are some riders and features you may be able to add to your level term policy:
Term Conversion Rider
If you want to convert your term coverage into a permanent policy, a term conversion rider can help. It allows you to convert your level term policy to a permanent one without needing a new medical exam or updating your medical information.
This rider can help remove some fears about insurability at the end of your term coverage. You'll continue your coverage, but expect that premiums will increase after the conversion.
Accelerated Death Benefit Rider
An accelerated death benefit rider (ADBR) allows you to access a portion of your death benefit while still alive and under special circumstances. If you have this rider, it can be enacted when the policyholder has a terminal, chronic, or critical illness and meets the insurer's eligibility standards.
The ADBR gives access to your death benefit for use now. It's often used to offset medical expenses. However, any funds used are deducted from your death benefit, which may impact your beneficiaries' financial stability after you're gone.
Waiver of Premium
Another type of rider that can help protect your life insurance policy is a waiver of premium rider. It's an add-on to coverage that waives or pays your life insurance premiums if you are unable to work due to an illness or disability. It helps ensure your coverage doesn't expire if you can't afford the premiums.
You may have to meet specific conditions and qualifications for your insurer to enact this rider. In addition, there may be a waiting period of up to six months before taking effect. There also could be an age or time limit on the coverage.
Child Rider
You can add a child rider to your life insurance policy so it also covers your children. With this rider in effect, your insurer will pay a death benefit if your child passes away while you're covered. The death benefit is typically smaller, and coverage generally lasts until your child turns 18 or 25.
This rider may be a more cost-effective way to help ensure your children are covered as riders can often cover multiple dependents at once. Once your child ages out of this coverage, it may be possible to convert the rider into a new policy.
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Level Term vs. Whole Life Insurance
Term life insurance only lasts for a set time, as opposed to permanent life insurance, which lasts for the remainder of your life. When comparing term versus permanent life insurance, it's important to remember there are a few different types.
The most common type of permanent life insurance is whole life insurance, but it has some key differences compared to level term coverage. Here's a basic overview of what to consider when comparing term vs. whole life insurance.
- Whole life insurance lasts for life, while term coverage lasts for a specific period.
- The premiums for term life insurance are typically lower than whole life coverage. However, with both, the premiums remain the same for the duration of the policy.
- Whole life insurance has a cash value component, where a portion of the premium may grow tax-deferred for future needs. Term coverage doesn't.
Level Term vs. Decreasing Term Life Insurance
One of the main features of level term coverage is that your premiums and your death benefit don't change.
With decreasing term life insurance, your premiums remain the same; however, the death benefit amount gets smaller over time. For example, you may have coverage that starts with a death benefit of $10,000, which could cover a mortgage, and then each year, the death benefit will decrease by a set amount or percentage.
The idea behind this coverage is that you may expect your beneficiaries to need less support over time. Due to this, it's often a more affordable type of level term coverage.
How to Buy a Level Term Life Insurance Policy
You may have life insurance through your employer, but it may not be enough life insurance for your needs.
The first step when buying a policy is determining how much life insurance you need. Consider factors such as:
- Age
- Family size and ages
- Employment status
- Income
- Debt
- Lifestyle
- Expected final expenses
A life insurance calculator can help determine how much you need to start. Once you have a general idea of your needs, contact a financial professional for guidance.
After deciding on a policy, complete the application. For the underwriting process, you may have to provide general personal, health, lifestyle and employment information. Your insurer will determine if you are insurable and the risk you may present to them, which is reflected in your premium costs.
If you're approved, sign the paperwork and pay your first premium. Your coverage remains active as long as you continue paying your premiums for the duration of the term.
Finally, consider scheduling time each year to review your policy. You may want to update your beneficiary information if you've had any significant life changes, such as a marriage, birth or divorce.
Find the Coverage That Fits Your Needs
Life insurance can sometimes feel complicated. But you don't have to go it alone. As you explore your options, consider discussing your needs, wants and concerns with a financial professional. They can help you decide on a life insurance policy that suits your budget and long-term goals.
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