Level-term life insurance pays a fixed death benefit throughout the coverage term. This differs from decreasing term life insurance, in which the coverage amount (or death benefit) decreases over time. Because of their affordability and flexibility, level-term policies are perhaps the most popular type of life insurance policy. Learn about the advantages and features of level-term life insurance and its alternatives to see which type of coverage is best for you.
What Is Level Term Life Insurance and How Does It Work?
Throughout the term of a level-term life insurance policy, the death benefit remains the same. For instance, if you buy a 10-year, $100,000 level term life insurance policy, your beneficiary will receive $100,000 if you die during the term of the policy. Along with the death benefit amount, you can also choose the coverage period (which typically ranges from one to thirty years) and any other features of the policy that the insurer may provide, such as a return of premium rider.The Workings of Level Term Life Insurance
The most straightforward type of life insurance is a level term. You choose the length of your policy and the amount of your death benefit (also called the face amount). Throughout the coverage period, the death benefit remains level or constant. Also unchanged is the premium. If you die during the contract period, whether in the first or last year of coverage, your beneficiary will receive the full death benefit.The Two-Year Period of Contestability
Contrarily, life insurance policies have a two-year contestability period, which indicates that if you pass away within the first two years of coverage, the insurer will have the opportunity to review the data you provided on your application and may choose to reject the claim. Your claim would almost certainly be denied if you failed to disclose an issue relevant to the insurer's risk, such as a serious health condition. If a policyholder commits suicide within the first two years of coverage, most insurance companies will deny the claim. The contestability period of two years applies to all life insurance policies, not just level-term ones. Note that if a life insurance policy's death benefit isn't paid out, the insurer is required to refund the premiums to your beneficiary.Term life insurance with a fixed rate vs. term life insurance with a variable rate
While level term insurance pays the same death benefit throughout the term, decreasing term insurance pays a lower death benefit over time. Typically, people buy a decreasing term life insurance policy to cover a growing financial obligation. You could, for example, purchase a 30-year decreasing term life insurance policy to cover a 30-year mortgage. As the mortgage is paid off, the death benefit decreases. However, if you die during the policy's coverage period, your beneficiary can use the death benefit to pay off the remaining mortgage balance. The death benefit of decreasing term life policies decreases over time, but the premium remains the same throughout the contract period.Level Term Life Insurance: Various Types
With a standard-level term life insurance policy, your coverage expires at the end of the contract period, and your premiums are not refunded. However, there are some term life insurance policies that have more flexible features.Term life insurance with a variable premium
An adjustable premium term life insurance policy allows the provider to offer a lower initial rate (premium) than comparable term life insurance policies that do not have this feature. However, the insurer has the option to raise the rate at any time during the term. Important: Adjustable premium term life insurance policies have a maximum guaranteed premium, which limits how much the carrier can raise your premium.Term Life Insurance with a Convertible Option
Some term life insurance policies can be converted to long-term protection. Convertible policies have a conversion period during which you can convert to permanent life insurance, which varies by policy. When you convert, your new premium will be based on your current age, and you will not be required to submit new health information or undergo a medical examination. Because permanent life insurance policies provide lifetime coverage and accumulate cash value, the premiums will almost certainly be much higher after conversion.Term life insurance that is renewable
Some term life insurance policies are renewable, allowing you to extend your coverage beyond the original term. A renewable term life policy allows you to renew your contract without having to undergo a medical examination. However, because age is a rating factor for life insurance, you'll almost certainly pay a higher rate when you renew.Premium Refund Term Life Insurance
When the coverage period of most term life insurance policies ends, you won't get any money back. However, depending on the insurer, some term life policies have a "return of premium rider," or feature, which reimburses you for some or all of your premiums. This benefit is usually only available if you complete the policy term. Note that policies with the feature are more expensive than standard term life insurance.Life Insurance in Other Forms
Term and permanent life insurance are the two main types of life insurance. Permanent life insurance, unlike term life insurance, covers you for the rest of your life as long as you pay the premiums. Permanent life insurance policies accumulate a tax-deferred cash value over time, which can help offset rising insurance costs as you get older. However, you can use this feature as a kind of savings account once your policy has built up a cash value: you can borrow against it or withdraw from it without losing the death benefit. On the other hand, permanent life insurance costs more than a term because a portion of your premium payment goes toward building the policy's cash value. Permanent life insurance policies are available in a variety of forms, including: Traditional whole life insurance provides a fixed death benefit, fixed premiums, and the possibility of dividends. Like other permanent policies, whole life insurance has a cash value that the policy owner can access. Whole life insurance policies are available from a variety of insurers. Universal life insurance is more flexible than whole life insurance in that you can change your premium payment and potentially increase the death benefit. Policies typically earn a cash value based on a money market interest rate. A minimum interest rate is guaranteed with universal life insurance policies. Indexed universal life insurance earns interest based on an index of investments, such as the S& P 500, rather than a money market rate of return. The amount of interest that the cash value can earn usually has an upper and lower limit. You can invest your policy's cash value in stock market securities through mutual funds in policy subaccounts with variable life insurance. This allows you to increase the cash value faster than you could with a non-variable policy. However, if your investments perform poorly, you may lose money, and the death benefit may be reduced.Important Points to Remember
- The most common type of term life insurance is a level term, which pays the same death benefit throughout the term.
- Some term life insurance policies include flexible features that allow you to change your premium payments, convert your policy to permanent insurance, recover some of your premium payments, or renew your coverage.
- People who only need life insurance to cover a financial obligation can opt for decreasing term life insurance, which has a death benefit that declines over time.
- Permanent life insurance, unlike term life insurance, provides lifetime protection and accumulates a tax-deferred cash value that you can borrow against if you need money.
- Permanent life insurance is available in a variety of forms.
