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Life Insurance

How Level Term Life Insurance Works and Why It’s Important

Level term life insurance provides a stated death benefit if the insured person dies while the policy is in force, and the premiums don’t change throughout the policy term. Because these policies are less complicated, they tend to be a less expensive option than permanent life insurance.

What is Level Term Life Insurance

Level term life insurance is the most common type of term life insurance. With level term policies, the premiums stay at the same rate throughout the entire duration of the term. This means whatever rate you began the policy with will be the same rate you end the term with, making your premium payments more predictable.

How Does Level Term Life Insurance Work?

Level term life insurance provides the same death benefit amount for the entirety of the policy’s term. For example, if the policyholder dies while the policy is still active, their beneficiaries could receive the same death benefit amount that was set at the beginning of the policy whether the policy was recently purchased or had been in force for decades. Level term life insurance is also sometimes called level benefit term life insurance for this reason.

This is unlike the other main type of term insurance — decreasing term insurance — where the death benefit decreases incrementally over time. This is typically used to address a debt that lessens over time as it is paid off, such as a mortgage or auto loan. Those looking for more steady coverage unrelated to a loan or debt, though, would find a level term policy more suitable for their protection needs.

Level term life insurance policies could serve as a policyholder’s sole life insurance policy or as an addition to another term policy or permanent life insurance policy. For example, a permanent life insurance policy may be out of the budget for someone who is just beginning their career.

In this case, a level term life insurance policy could help provide more affordable protection during the first few years of their professional career. A permanent life insurance policyholder may also decide to purchase an additional level term insurance policy if they have children and want additional protection for a few decades until their children are grown and independent.

Advantages of Level Term Insurance

Level term life insurance could be a good choice for those seeking a stable and predictable monthly policy premium and overall death benefit amount.

  • Level term life insurance provides the same death benefit for the entire term. This means if the policyholder dies during the last year of a 20-year level term policy, their beneficiaries would still receive the policy’s total death benefit. However, if the policyholder had a decreasing term policy, their beneficiaries would receive only a portion of the original death benefit, as it drops each year that the policy is in force. 
  • Level term life insurance allows the policy owner to provide financial protection for beneficiaries during times when they need it. With level term life insurance, it’s possible to tailor coverage to meet the needs of the policyholder. For example, parents may choose to purchase 20-year level term policies when a child is born to help pay for ongoing expenses and education costs in case one parent dies while the child is still living at home. Level term policy lengths could be set to coincide with when the child becomes independent and life insurance coverage is no longer needed.
  • Level term life insurance is inexpensive compared to whole life insurance. Whole life insurance policies are more expensive because a portion of your premium payments goes toward the cash value component built into permanent life insurance benefits. Level term policies, on the other hand, do not typically offer a cash value component. As a result, whole life insurance is generally much more expensive than a level term life insurance policy with the same death benefit. 

Disadvantages of Level Term Insurance

Level term life insurance may not be the right choice for everyone, such as those looking to protect against a diminishing debt or more long-term solutions beyond a few decades.

  • Level term life insurance does not account for temporary coverages where payout needs decrease over time. For those seeking extra protection for mortgages, loans, or other costs that would decrease over time as the debt is paid off, a decreasing term policy would be more suitable.
  • Level term life insurance does not build cash value over time. Unlike whole life insurance, which a policy owner may be able to eventually borrow against or take cash out, level term life insurance only provides a death benefit. It does not have any cash value, and you can’t borrow against it for supplemental income or emergencies.
  • Level term life insurance can become too expensive for long-term coverage. Even though level term policies have the same premium amount each month during the initial term, it can become costly after that. For example, an insured person may purchase a 20-year term at $50 per month. But after the initial 20-year period, the premium may renew at $150 per month. Level term life insurance policies have end dates, and if you choose to keep your policy at that time, you can usually expect a large increase in price. This can result in higher premium costs with each term policy renewal, which can vary depending on the policy and insurer.
  • Level term insurance may cancel at the end of the initial term. Although some policies will allow the insured to keep the policy after the initial term at a higher premium, some level terms may cancel altogether at the end of the initial term.

Who Should Consider Level Term Insurance?

Anyone who provides financial support for other people could find the protection offered by level term insurance beneficial. Those looking for life insurance coverage in general may consider a level term policy before they purchase a long-term permanent life insurance policy.

For example, parents of young children and those who want to start a family may purchase level term life insurance to provide ongoing financial support. They may buy enough coverage to account for the cost of childcare services, education, and cost of living, as well as factoring in income replacement during the years that the children would require financial support. 

Another example would be those who are looking  for an affordable alternative to permanent life insurance policies. Level term life insurance is less expensive, but can still provide financial protection to loved ones in case of the policyholder’s death. However, keep in mind that level term life insurance is not a good option for long-term coverage that spans more than several decades, as each time the policy is renewed, premiums will increase. For long-term coverage that will last the duration of your lifetime, consider a permanent life insurance policy instead.

What to Look For in a Level Term Insurance Policy

Look for a level term life insurance policy with premiums that fit within your budget. If you can’t make the premium payments, the policy might terminate, leaving you without coverage. It is important to consider what you could comfortably afford. In addition, choose a term that covers the years you have the most significant financial commitments.

For example, young parents may choose a 20-year term so that by the time the life insurance policy term ends, their children would have likely moved out and become financially independent. Finally, consider the overall reputation of the insurer when it comes to customer service, clarity, and reliability.

What Happens at the End of a Level Term Insurance Policy?

When a level term life insurance policy expires, the coverage may terminate completely, or the policy may be renewed at an increased premium rate. Typically, renewing a policy won’t involve submitting to another medical examination and health questionnaire to reassess your mortality risk.

Some policies may also be converted at the end of the term to a permanent life insurance policy. Doing so would still result in an increase in premium, but the coverage would not need to be renewed again as long as you continue to pay to keep your policy active.

If the policyholder outlives the life insurance policy term and they had purchased a return of premium rider, the insurance company may refund the premiums paid at the end of the initial term. Keep in mind, however, that return of premium riders increase the cost of level term life insurance.

Overall, those who outlive their level term life insurance policies initial term will not have a death benefit paid out to their beneficiaries, unless they choose to renew it or convert it.