Understanding Level Term Life Insurance
The payout for level term life insurance stays the same for the length of the policy.
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With level term life insurance, the death benefit stays the same the entire time the policy is in effect. Your beneficiaries will get paid a preset amount whether you die in the third year or last year of your policy. It can also be called level benefit term life insurance, because the death benefit of the policy remains unchanged.
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What is level term life insurance?
Level term life insurance is a type of term life insurance. It provides a payout upon death that stays the same or “level” for the policy term.
Confusingly, level term life is also 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 term policies available today are some flavor of level term life, but it’s worth being clear about what product you want when talking to a life insurance agent or when shopping online.
Pros 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 easier. 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.
Cons 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 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 annual renewable policy and reapplying for a level term life policy later. 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 get a rate reconsideration in the third year of coverage if they haven’t smoked for at least one year.
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.
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Level term vs. decreasing term life insurance
Unlike a level term policy, decreasing term life is life insurance with a decreasing death benefit. This means the payout your beneficiaries receive will shrink over time, hopefully in line with a need for less coverage. Decreasing term life insurance is often less expensive than level term life insurance because the payout goes down.
Mortgage life insurance is an example of this type of life insurance where the payout decreases as you pay down your mortgage.
Who should consider level term life insurance?
Level term life insurance can be a good choice if you want to lock in affordable, predictable premiums and a payout amount your beneficiaries can count on.
However, if you have health concerns that are expected to improve or more complicated financial needs, you may want to explore other kinds of term life insurance.
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Managing a level term life insurance policy
While level term life insurance is a popular option, it might not always be the best fit for every stage of your life. Here are a few ways you can adjust a level term life insurance policy to better meet your needs.
Increasing or decreasing your death benefit
If you want to increase your death benefit, you might need to reapply. That means you’ll repeat the whole application process, including new forms and a new life insurance medical exam.
However, decreasing your coverage is much easier and can be a good option if you’re struggling to pay your life insurance premiums. 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.
Ladder your level term life insurance
If your life insurance needs will decrease over time, 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 because shorter policies are often cheaper.
How does laddering level term insurance work? Let’s say you just financed a new home worth $350,000 and are worried about your family’s ability to afford the 30-year mortgage without your income. You could take out two different level term policies. One of those policies could be a 10 year policy that has a life insurance face value of $250,000 coupled with a 20 year level term policy for $100,000.
Because your policies end at different times, this laddering system reduces your coverage as your needs decrease. As policies expire, your total premium paid goes down as well.
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