Most term life insurance policies are what is known as a “level term policy” type. A level term life insurance policy is one that is not permanent, but the death benefit and the premium rate are fixed at the same amounts for the specified term of the policy. When people mention “term life insurance”, they are almost always referring to level term life insurance.
A level term policy may be renewable at the end of the policy term period for a highly increased rate, but this is not guaranteed. You can also purchase a non-level type of term life insurance which is called annually renewable term, and the premium changes each year as the insured person gets older.
People buy this type of life insurance because the benefits and costs are predictable and generally affordable. This is the least expensive type of life insurance based on the annual premium due. You can get a really good deal on a level term policy compared to whole life or universal life, but you sacrifice many of their other features such as cash value. Here is an in depth discussion about level term life insurance. In this article we cover:
- Features of a Level Term Policy
- Premiums Don’t go up or Down
- Death Benefit Stays the Same
- The Coverage Expires
- No Cash Value
- Why People Purchase Level Term
- Alternatives to Level Term
- Shopping for the Right Policy
Features of Level Term Life
This type of policy is not a permanent form of life insurance (though whole life insurance premiums may be level as illustrated). The length of coverage is set to expire after a certain amount of time, which varies depending upon the exact contract that you buy. Life insurance companies offer many different term lengths, typically as short as 5 years and sometimes as long as 30 or 40 years. Here are the important things you need to know about level term life insurance policies:
- The death benefit stays the same throughout the policy.
- The premium payment stays the same for the whole term period.
- It is an inexpensive form of life insurance coverage.
- It expires (does not last your whole life).
The longer the length of coverage, the more expensive the annual premium generally is because the risk of the insured person passing away during the coverage period increases with time. Similarly, the older the person is when the coverage begins, the higher the insurance premiums will be, all else being equal.
Premiums Don’t Go Up or Down
The premium, or cost of the policy, does not change. There are no dividends paid to owners of this type of policy to reduce the premium. Conversely, by law, the life insurance company can not increase your premium amount during the coverage. Even if you have a significant change of health such as a heart attack, stroke, or cancer diagnosis, the insurance company is obligated to cover you until the end of your contract for the originally agreed-upon price.
The level premium structure is very attractive to people because they can budget appropriately. They know exactly how much the policy will cost every month or year, and it does not change.
The Coverage Amount Stays the Same
The second component of a level term policy that stays level is the death benefit. The insurance company can not legally reduce your death benefit during the policy duration unless you agree to the change (you might want to do this to reduce your premium payment).
It is also true of most permanent forms of life insurance that the face amount doesn’t change, but the death benefit can. Things like loans, withdrawals, or dividend payments used to buy additional paid-up insurance can affect the actual death benefit of permanent forms of life insurance. Additionally, there are special types of policies called modified coverage life insurance policies (sometimes called mortgage insurance) where the face amount is actually designed to reduce over time.
Permanent forms of life insurance with death benefits that can change include whole life, universal life, variable universal life, and variable life insurance. Each form can have specific features that affect the death benefit up or down in relation to the face amount but suffice to say the face amount does not always equal the amount of coverage.
Level term policies are a bit more straightforward, the face amount of the contract is always equal to the death benefit. If you question the amount of coverage that you have, you can always consult your actual policy (which is a legally binding contract) to see. You can not take a loan, increase your face amount (unless you have a specific rider allowing you to do this), or take partial surrenders of a term policy.
The Policy Expires
As with any term policy, the coverage will expire. Term insurance, by definition. is not meant to stay in force forever. Life insurance companies offer different lengths of policy coverage, usually 5 years, 10 years, 15 years, 20 years, and then 25, 30, or possibly 40 year coverage periods depending upon the offerings available from the company.
Some term policies have a conversion feature, which allows you to convert the face value (or a portion of the face value) to a permanent whole life policy. Typically this has to be done before a certain policy year, such as year 10. You do not need any additional underwriting or proof of continued good health to do this. Because this is a risk to the insurance company (people who had a change in health who can’t get another term policy are most likely to want to convert their policy to permanent insurance) this feature does not come with every policy. Sometimes the option to convert is purchased as a separate rider called the term conversion rider when you first buy the policy and paid for it with increased total premiums or other times it is a feature of the policy when you buy it. Either way, this is a valuable option to have. If you outlive your life insurance coverage but you aren’t in good enough health to get a new policy, you will be without any life insurance.
Level Term Policies Have no Cash Value
Permanent life insurance policies have a cash value. This works a little bit like a bank account that allows you to take withdrawals from the policy or loans. You can also surrender your whole life or universal life policy for cash before the policy matures. Many people don’t realize how good of an investment whole life insurance can be in some cases, it actually gives a positive rate of return to owners over time, so the policy will eventually be worth more than the premiums paid.
In contrast, level term life does not have a cash value. It is purely a payment to the insurance company for temporary financial protection against loss of life. If you surrender the contract, you are forfeiting your coverage and stopping premium payments. You don’t get any surrender value and you can’t take loans against the policy. Similarly, level term policies are not considered participating policies and do not receive dividend payments, and they are not considered to be an asset by law.
Why People Buy Level Term Life Policies
People buy level term policies because they are affordable and predictable. People know exactly how much coverage they have, how long it lasts, and how much it costs. With other types of policies, variations in dividend payments (which can be used to pay against premium), cash value, and costs of insurance in the case of universal life policies can all create variability with the amount of premium required to keep the policy in force and the ultimate death benefit. Level term has no ambiguity.
It is also much less expensive than whole life insurance or other forms of permanent life. For a fraction of the price, people can get the same coverage (albeit for a shorter time). Financial advisors used to steer clients towards whole life insurance, but lately, the trend has been more towards term life. Popular financial planning personalities have pushed the “buy term and invest the difference” mentality that people can get a higher rate of return in stocks than in permanent life insurance. This is certainly a viable strategy for many people.
The difficult thing to impart on people is that there is not a one size fits all solution when it comes to life insurance. For many people, a level term policy provides exactly what they need. For other clients, the time frame, tax benefits, or investment value of a permanent form of life insurance makes it a better fit.
Below is an illustration showing a level term policy compared to a whole life policy over time. This is what potentially would happen if you set dividends to purchase additional paid-up whole life insurance.
The whole life policy pays dividends every year, and by purchasing additional paid-up insurance, the dividend payment compounds in value and the death benefit rises more and more. The term policy coverage stays level for 20 years, and then suddenly goes to $0. Neither policy is better than the other, but the buyer needs to understand the difference before they make a decision about which one to buy. A level term policy may only cost $200 a year, while the whole life policy with the same death benefit may cost 7 or 8 times as much. If the owner decides to use dividends to pay premiums instead of purchasing additional insurance, the premium can be significantly reduced over time, even down to nothing. If you are interested in getting a quote on a level term policy, we can compare policies from different companies here at Life Ant to find you the best deal.
Alternatives to Level Term Life Insurance
A level term policy is a great option for many people, but not the best choice for everyone. The biggest issue for some people is that level term life insurance expires. Some people need permanent coverage. A whole life insurance policy is usually the best option for permanent coverage, but for some sophisticated people with niche needs a universal life insurance policy may work well. Another advantage of whole life insurance is that it can be an investment for the owner. A whole life insurance policy will eventually be worth more than the premiums paid into the policy at some point, whereas a level term policy has no surrender value. A whole life policy has significantly higher premium payments at first, but eventually, dividends can pay all of the premium due in most policies.
Another common alternative to level term life insurance is an annually renewable term life insurance policy. While the death benefit stays level in this policy type, the premium slowly rises over time. Each year as the insured person ages, the life insurance company uses their current mortality tables and pricing to offer the policy at the current price. Annually renewable policies may be less expensive than level term policies in the first years, and more expensive in later years. An advantage of annually renewable term policies over level term policies is that they can provide coverage for a longer period of time. Life insurance companies offer these until the insured person attains a certain age, such as 95 or 105. It is possible for someone to outlive an annually renewable policy and the premium payments can not be recovered. The later years are also extremely expensive compared to the beginning years. If the goal of the coverage is to keep the policy in force for someone’s entire lifetime, a whole life policy is usually a better deal in the long run than an annually renewable policy. An annually renewable policy can be useful for someone who does not know the exact term length that they need and wants the flexibility to renew the policy each year.
How to Shop for the Right Policy
An agent can help you find the right policy but you can perform a lot of research yourself. Assuming that you do not need a permanent policy, you first need to calculate the amount of death benefit coverage that you need. Secondly, you need to decide how long you will need the coverage to provide a death benefit. The most common coverage length is 20 years, but term policies are offered between 5 and 40 years. The length of coverage has a large effect on the price of the policy because the longer the coverage lasts, the more risk the life insurance company has that the insured person will die.
In terms of price, this type of life insurance policy is extremely competitive so most companies will offer a very similar price, but the differences can add up over time so it is important to get a good deal. You can review our list of best life insurance companies, but make sure to choose a company with a strong financial rating that you can count on to pay a claim. The most important thing is to work with an agent and company that you are comfortable with, that you can count on to give good guidance and service and to be there when you need help.