How Does Level Term Life Insurance Work?

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Life insurance agents generally recommend whole life insurance if they are commission-driven. However, solution-driven agents and financial advisors typically recommend term life insurance, specifically, level term life insurance. 

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In this article, we’ll look at why level term life insurance is the most popular form of term life insurance, how it compares to other types of term life insurance, why most advisors recommend it over whole life insurance, its cost, and other essential things to know about level term life insurance.

What Is Level Term Life Insurance?

Most people shopping for life insurance need term life insurance, which is called that because it provides a promised death benefit by the life insurance company in exchange for a payment (premium) for a specific period of time. 

With level term life insurance, everything stays the same throughout the term of the policy: the premium stays the same, and the death benefit (payout) stays the same. As we’ll explore later on, this differs from other types of term life insurance. 

Level term life insurance is straightforward coverage, which is a big part of why it’s as popular as it is. And because of its popularity, many top-rated life insurance companies offer it, so it’s easy to compare quotes and get the most competitive premium.

The process for being issued a level term life policy is much like any other type of life insurance policy:

  1. Select a coverage amount and length of the term you want that coverage in place. Along with these two parameters, your age, gender, and health will also affect your premium.
  2. If the insurer approves you and the policy is issued, you pay the premium monthly or annually to keep the policy in force.

If you pay your premiums on time and your policy stays in force, there are a couple of scenarios you want to be aware of:

  • If you die while the policy covers you, your named beneficiaries will receive a tax-free death benefit.
  • If you outlive the term of the policy, it will expire without paying anyone a death benefit, and you’ll stop making premium payments.

When term life insurance policies end, you can then purchase a new policy if you still need coverage. However, you will need to qualify medically for the policy to be issued, which is more difficult as you get older.


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What’s the Difference Between Level Term and Term Life Insurance?

You may understandably get confused if your life insurance agent recommends “term life insurance.” They’re most likely referring to level term life insurance, which is just one type of term life insurance. But as mentioned previously, there are different types of term life insurance.

There are three types of term life insurance: annual renewable term life, decreasing term life, and level term life insurance. 

Annual renewable term life insurance

Annual Renewable Term, or ART, maintains a level death benefit throughout the term of the policy, but the premium amount changes every year as the insured individual gets a year older. 

People buy ART because it’s inexpensive in their younger years, and it’s a good policy to have if you only need life insurance protection for a short period of time.

Decreasing term life insurance

With decreasing term life insurance, the premium remains constant, but the face amount of insurance decreases by a set percentage every year. People buy decreasing term life insurance to have insurance for a need that has a set expiration date, like a mortgage or a bank loan.

Level term life insurance

Level term life insurance has features of both annual renewable term life insurance and decreasing term life insurance: the premium stays level (like decreasing term life), and the death benefit remains level (like ART). 

In other words, everything stays level—the premium and the face amount—for the stated term of the policy, which typically ranges from 10 to 30 years.

Who Typically Buys Level Term Life Insurance?

Like any other type of life insurance, most buyers of level term life are relatively young. The reasons are numerous and include:

  • They are generally in better health and can qualify for a policy.
  • Premiums are lower for younger people and increase as you age.
  • They typically have more debt than older individuals, namely a mortgage or student loans.
  • They have children still living at home that they need to protect financially.

However, that’s not to say that people in their 40s and 50s don’t buy level term life. For instance, if they’ve built a business with a partner and want to protect their business interests, both partners will insure themselves, with the other partner being the beneficiary. This scenario is usually part of a buy-sell agreement.


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How Much Does Level Term Life Insurance Cost?

The table below illustrates the cost of 20-year level term life insurance for various face amounts. You’ll notice that the rates for females are less than those for males because their life expectancy is longer. 

But rates for either gender will vary depending on individual health history at the time of application for coverage, as well as other criteria such as being a smoker or non-smoker. 

Also note how the premium increases are exponentially higher as the insured ages. This is why life insurance agents and companies always recommend that you purchase life insurance as early as you can in life—the premiums are lower, and you’re healthier.

Age

Gender

$250,000

$500,000

$750,000.00

$1,000,000

25

Female

$14.23

$21.23

$28.25

$34.52

 

Male

$17.12

$27.08

$37.04

$45.14

35

Female

$16.47

$25.41

$33.53

$42.63

 

Male

$18.68

$30.27

$40.42

$51.73

45

Female

$28.39

$47.49

$66.94

$86.31

 

Male

$35.28

$60.76

$85.81

$113.60

55

Female

$60.23

$107.94

$155.48

$206.06

 

Male

$83.64

$151.23

$222.86

$286.53

What Are the Advantages and Disadvantages of Level Term Life Insurance?

Level term life insurance is the best choice for many people, but not everyone. Let’s look at the pros and cons of level term life.

Advantages of level term life insurance

The advantages of level term life insurance include: 

  • It’s the most inexpensive type of life insurance for most individuals.
  • It’s easy to track and manage.
  • You won’t pay extra fees unless you add various riders to the policy.
  • The policy only lasts as long as you need the coverage.
  • Premiums and death benefits never change.

Disadvantages of level term life insurance

The disadvantages of level term life insurance include the following:

  • If you outlive the term of the policy it expires, requiring you to buy a new, more expensive policy later if you still need life insurance protection.
  • It accumulates no cash value.
  • If you outlive the policy, premiums aren’t refunded to you.

An experienced, licensed life insurance agent or financial advisor can help you weigh these pros and cons to determine if level term life insurance is the best option for your situation.

How Do Premiums and Payouts Work With Level Term Life Insurance?

Premiums and payouts for level term life insurance work similarly to other life insurance products.

Premiums are determined by your age, gender, health history, driving record, and whether you smoke or not. The policy's face amount will determine your monthly or annual premium.

The amount of the payout to your beneficiaries will also depend on the face amount of the policy. How long it takes to get a life insurance payout will vary from company to company, and whether or not the death claim needs to be investigated for any reason. Barring this type of complication, payouts generally happen in two to six weeks.

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Are There Any Good Alternatives to Level Term Life Insurance?

There are several alternatives to level term life insurance that may, depending on your specific situation, suit you better. 

Annual renewable and decreasing term life insurance

We explored the different types of term life insurance above. These are two of the key alternatives to level term life insurance. Here are some examples of when you might prefer one of these over level term: 

Annual renewable term

You might need life insurance while you’re paying off a 36-month car loan. In this case, annual renewable term is probably a better option than level term life.

Decreasing term

If you just took out a 15-year mortgage, you’ll definitely want to compare the cost of a decreasing term insurance policy to that of a level term life policy. Depending upon your age and other factors, a decreasing term policy might be your best option.

The main alternative to level term life insurance, though, is whole life insurance. 

Whole life insurance

Let’s look at some of the characteristics of whole life insurance that can, at times, make sense for someone to choose it over level term life insurance.

  • The premium and death benefit remain the same for your whole life. These factors stay the same for a level term premium policy, too, but a level term policy expires. That means that you may have to purchase a new policy, which may have different premiums and a different death benefit. A whole life policy never expires, as long as you pay your premiums, so you can have the same terms for the rest of your life. 
  • You can take advantage of tax-deferred savings. In addition to a tax-free death benefit being paid out to your beneficiaries, whole life policies build up tax-deferred cash value. These savings can be withdrawn or borrowed and serve as a supplement to retirement plans.
  • You may receive dividends. Whole life insurance policies issued by mutual companies often pay an annual dividend to their policyholders, which is a way of sharing their profits. Dividends can be taken in cash or applied to the cash value of the policy. 

Level term life insurance does have that one all-important advantage over whole life insurance—a much lower cost. 

As a result, many financial planners recommend buying level term insurance and investing what you saved in premiums in a mutual fund or another type of account that can grow, tax-deferred, at a significantly higher rate than a whole life policy.

Pick a Reliable Life Insurance Company

Regardless of what type of policy you choose, take a look at the financial ratings of the company you prefer, which you can find online. There are many good companies to choose from, so take the time to select a company that you feel confident will be there for you and your beneficiaries in the future.

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