Understanding Level Term Life Insurance
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Level term life insurance is a policy that has a level death benefit for the entire time the policy is in effect. Your beneficiaries will get paid the same amount regardless of whether you die in the third year or last year of your policy. It can also be called level benefit term life insurance, highlighting the death benefit as the unchanging part of the policy.
Confusingly, level term life is sometimes used to talk about a policy with a premium that doesn’t change over its life. This is actually a level premium term life insurance policy, but it’s often simply referred to as "level term life insurance."
The two options usually go hand in hand: a level life insurance death benefit with level premium payments. Most of the "normal" term policies available today are some flavor of level term life, but it’s worth clarifying which product you want when talking to a life insurance agent or when shopping online.
» MORE: Compare life insurance quotes
Advantages of level term life insurance
It’s predictable. You know how much money you’ll be leaving to your life insurance beneficiaries if you die during the policy term. This means you — and they — can make plans with a single dollar amount in mind.
It helps with budgeting. Since level benefits often mean level premiums, budgeting can be easy. The amount you pay for coverage stays the same year-over-year, assuming you don’t make any changes to your policy.
It can be cheaper in the long run. Level term life also allows you to lock in a rate and coverage amount based on your current health. If you’re young and healthy, this means you can get 10, 20 or even 30 years of affordable life insurance coverage.
One of the alternatives to level term insurance is annual renewable term life insurance. These policies renew each year, with rates going up as you get older. Insurers usually won’t require additional health exams between renewals, but the price you’ll pay isn’t always fixed and can increase along with inflation. While these policies typically have lower premiums in the first few years, the premiums for level term life are lower over the long term.
» MORE: Average life insurance rates
Drawback of level term life insurance
Premiums are linked to your health. Rates for level term life insurance are locked in based on your current health, and not everyone is as healthy as they can be — or plan to be. If you lock in a 20-year rate with your current medical history but you aim to get healthier over the next few years, you could be paying a level — but inflated — price for all 20 years. In this case, you might be better off getting an annually renewable policy for a shorter period of time. Then, once you’ve settled into a healthier life, you can reapply for a level term policy. Some insurers allow you to apply for a lower rate on an existing policy if your health has improved. For example, smokers may be able to apply for a rate reconsideration in the third year of coverage if they haven’t smoked for at least one year.
Level term vs. decreasing term life insurance
Decreasing term life is life insurance with a decreasing death benefit. This means your coverage will drop over time, hopefully in line with a need for less coverage.Mortgage life insurance is an example of this type of coverage, though not all versions of decreasing term will be directly tied to how much you owe on your mortgage.
Decreasing term life insurance is often less expensive than level term life insurance because the payout goes down.
» MORE: What is term life insurance?
Increasing and decreasing your death benefit
If you want to increase your policy, you might need to effectively reapply. That means new forms, a new life insurance medical exam and the whole process repeated to make sure you’re not too risky to qualify for more coverage.
Decreasing your coverage is much easier. Usually, there’s a form you’ll need to fill out, and your insurer will issue you a new payment plan. That’s it. A few minutes of paperwork and you’ve got less coverage.
If you want a more automated approach to coverage reduction, you could "ladder" your term insurance policies instead. With laddering, you stack up term policies to get to the total coverage you need. This lowers your overall premiums, as shorter policies are often cheaper.
At the beginning of your coverage, you might have three term policies that add up to $350,000. One of those policies lasts five years with a $10,000 "face value" — face value is the amount of money your policy is worth. The second policy has a life insurance face value of $240,000 and lasts 10 years. The final policy is for $100,000 and lasts 20 years, when your mortgage will be paid off.
Because your policies will end at different times, this laddering system gives you automatic reductions in coverage as your needs decrease. As you drop policies, your total premium paid will go down as well.
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