Term and permanent life insurance are the two basic types of life policies. However, both have sub-categories, and it is not rare for people to mix up term policies due to different names. So learning about the features of each and distinguishing them is crucial.
Level term life insurance, also called level premium term life insurance, is one kind of term life insurance policy that offers coverage for a specific period, and its premiums don’t fluctuate during that time.
This article will help you figure out level-term life insurance policies by telling you about:
- What is level term life insurance?
- How does level-term insurance work?
- What is the optimal coverage amount you would need?
- How to buy a level-term policy?
- Pros and cons of level term life policy.
- What is the difference between level term life insurance and decreasing term life insurance?
- What are other alternatives to level-term life?
- How you can become financially independent.
Let’s get started!
What Is Level Premium Term Life Insurance?
A word term in this type of policy refers to the pre-set period for which the policy will last.
A level term life insurance policy is the simplest form of coverage that holds the same level of a death benefit during the policy term. If someone buys a 10-year policy with $100,000 coverage, their beneficiaries will get a $100,000 payout if the policyholder dies at any time during the contract period.
Of course, as with every term policy, the policyholder has to choose a death benefit amount and the length of coverage. This type of policy is one of the most popular because it’s affordable and flexible.
Key Features
- It provides a limited protection term, from one to 30 years, but typically for 10, 15, 20, or 30 years. This is the opposite of permanent life insurance, where protection is for the entire life.
- Typically the death benefit is paid out in a lump sum as tax-free. It’s not the case if paid for with pre-tax money.
- As we mentioned, the premium remains the same for the whole length of the term.
- With the expiration of the term expires the life insurance protection. When it happens, people either get a new policy or just stop having protection.
- Unlike permanent life insurance, any type of term life insurance policy, including level term, doesn’t have a cash value component. That’s why it’s sometimes referred to as a ‘pure life insurance product’ – designed only to provide a death benefit for a certain period.
How Level Term Life Insurance Work?
You should know that most applicants usually have to go through a life insurance medical exam. Besides that, every applicant has to choose the coverage amount and the policy’s length.
With term life insurance, the policy pays a death benefit to beneficiaries if the policyholder dies during a fixed period. If the policyholder outlives the term timeframe, there is no payout.
How much coverage and period the individual will choose depends on the intentions and how much they want to pay monthly. Based on the insurance company offering a term policy, you might have an option for renewing it or converting it to a permanent one.
You should check this with the insurer before getting one, as many people realize that permanent coverage suits them more.
And if you are sure that you want only temporary coverage, an option to renew is often more convenient than buying a new policy because it doesn’t require a new medical exam. But on the other hand, renewed policies are often more expensive.
How Much Insurance Do You Need?
Since it’s designed to provide protection when the individual needs it, the right amount is different for everyone. However, the best way to conclude what would work best for you is to consider any current and future expenses you want to cover. By that, we mean:
- Annual income,
- Outstanding loans (student loans, mortgage payments, credit cards, or others),
- Future expenses – anything from your kid’s college tuition to medical or funeral expenses,
- And always remember to have an extra financial cushion to be safe.
When accounting for the policy’s amount, don’t forget to consider your current savings and other assets. Regarding the length of the policy, it will depend on your current age. It’s crucial to check the maximum age limit, especially if you are over 50.
Most commonly, people over 50 can not choose the 30-year policy. It will depend on the company where you are buying a policy, but it’s something you have to think about. You can find many calculators on the internet to help determine your perfect policy.
How to Buy It?
Your level-term life insurance can be bought the same way as any other insurance: from an insurance company, through an agent or broker, or online. This is one of the reasons why people argue that it’s easier to apply for term life rather than permanent insurance.
If the applicants are in good health, signing up online is straightforward. It doesn’t require an in-person test and usually takes one day. Buying a policy through an agent or broker can be better for people who are unsure which policy to get and from which company (in the case of an agent).
Insurance purchasing from the insurance company is the oldest and the most traditional way. Make sure to check the company you want to buy from twice! Luckily, there are many reviews and comments you can look up on the internet.
Advantages
Let’s see what you can get if you choose level-term life policies!
Affordable Protection
Level-term life insurance is often cheaper than any permanent policy and usually one of the most affordable of other term life policies.
Customization
Since every policy owner chooses the length and the amount of coverage, it is a huge benefit because everyone can take exactly what they need.
Level Premiums Stay the Same
There is no surprise – every month, you pay the same premium.
Disadvantages
Temporary Life Insurance Coverage
Most people prefer permanent coverage over temporary because of the risks of becoming ill and the need for medical and funeral expenses. In addition, if the policyholder outlives the policy term, getting a new policy is everything but convenient. Since they are now older, they will probably pay more for a new one than they did for the previous one.
No Cash Value
Level-term life insurance doesn’t have a cash value component, meaning with this policy, you are getting only life insurance coverage and no possibility to grow your cash and invest.
Maximum Age Limit
The upper age limit depends on the individual insurance company and the length of the term policy, but it is usually 50 years old. That means people who are older than 50 years don’t have the option to buy a 30-year term life insurance policy.
How Much Does It Cost?
The cost of level-term life insurance depends on many factors, including age, health, coverage length, and amount. Most often, the level term is a very cost-effective option, and here is an example:
For a 40-year-old male who has $250,000 of coverage in term life insurance, the monthly cost will be:
- $16 if the length of the term is ten years
- $18 if 15 years
- $21 if 20 years
- $31 if 30 years.
It is similar for a woman with the same coverage:
- $14 for a 10-year policy
- $17 for 15-year
- $19 for 20-year
- $25 for 30-year
Level Term Life vs. Decreasing Term Life Insurance
Decreasing term life insurance is a policy where the death benefit decreases over time. That means that the coverage will drop over time, which is why this policy is often used for covering financial obligation that gets smaller every year (like mortgage or business loans).
For example, mortgage life insurance is the best example of decreasing term life policies. Even though the death benefit reduces over time, the premium stays the same during the contract period.
In comparison, decreasing term life is often more expensive than level term life insurance.
On the other hand, declining term life is more straightforward. It takes just a few minutes of paperwork – once you fill out the form, the payment plan is ready.
Unlike with decreasing term life insurance, you have predictable financial protection with the level term.
Other Life Insurance Alternatives
Another type of term life insurance policy that people find beneficial is renewable term life insurance. It’s designed to allow insured people to extend (or renew) their policies for an additional term.
People like this alternative because there is no requirement for a new medical exam. Premiums in these policies typically increase on a year-to-year basis. However, the yearly renewable term is often more expensive than level term life insurance due to rising insurance rates after every renewal.
Let’s see the situation with policies from another category – permanent life insurance policies. Unlike term policies, these policies offer lifelong insurance coverage and have a cash value component that supports building wealth and investing.
Whole life, universal life, and variable life insurance are the three main types of permanent insurance.
Universal life insurance has premiums and death benefits that increase or decrease over the policyholder’s lifetime. With a whole and universal life policies, the policy’s cash value grows. The difference is that in whole life, it’s fixed, while universal life insurance isn’t. It rests on current market conditions.
However, we think that whole life insurance is the best alternative option. Here is an explanation!
Whole Life Insurance
Whole life insurance has a cash value component that provides death benefit growth and helps beat inflation. The most significant benefit with your whole life is the opportunity to withdraw and borrow money against your policy.
How does whole life insurance work? you might ask. Even though permanent policies are often more complex than term ones, that’s not the case with whole life.
Premiums in whole life remain the same for as long as the policyholder lives. Besides that, you have guaranteed cash value, growing at a fixed rate. Annual premiums are higher than term policies, but you have many more opportunities and benefits.
The whole life policy is unique for every applicant. It’s designed based on the mortality risk, current health, medical history, coverage level, and additional features (like premium rider). When you’re done with the underwriting process and medical tests, the insurer’s set guaranteed values:
- A guaranteed cash value that grows at a set rate annually.
- A guaranteed death benefit
- A guaranteed level of premium payments
- A guaranteed endowment.
Thanks to these pre-set details, there is no room for surprises. Whole life allows you to keep paying the same amount, but access increased death benefit coverage as the policy matures. You know what to expect and what to do while your policy is active.
We mentioned that whole life support option to withdraw and borrow money against your policy. Now it’s time to elaborate it.
Become Financially Independent
The Infinite Banking Concept, also called over-funded life insurance, is a unique financial strategy that can help you earn money. With the Infinite Banking Concept, you can get a better investment return, build wealth, and create a fantastic future.
This concept is designed to imitate the process of a traditional bank. So, you can operate and borrow money from your whole life policy. You completely control your cash flow and the period of return.
You become a creditor and a lender at the same time. Or, to put it another way, you will become your own bank. And everything you do will be for your benefit and your secured future! No more paying high fees from traditional banks.
The aim is to replicate the banking process as much as possible because, in that way, you will boost the value of your bank. To start the Infinite Banking Concept and achieve financial independence, all you need is a whole life policy, and you will ensure life protection and investment vehicle with one tool.
Final Thoughts
So, what is the verdict? Is level-term life insurance suitable for you or not? The answer is that it depends on your needs.
We think that whole life insurance is a much better option. It provides lifelong protection, builds wealth over time, and can help you break free from the banks.