Level term policies are, perhaps, the most popular type of life insurance policies due to their affordability and flexibility. Discover the benefits and features of level term life insurance, plus its alternatives, to determine which type of coverage best suits your needs.
What Is Level Term Life Insurance?
A level term life insurance policy maintains the same death benefit throughout its term. For example, if you buy a 10-year, $100,000 level term life policy, your beneficiary will receive a $100,000 payout if you die at any time during the contract period. In addition to choosing a death benefit amount, you also choose the length of coverage (which typically ranges from one to 30 years) and any other policy features offered by the insurer, such as a return of premium rider.
How Level Term Life Insurance Works
Level term life insurance is the simplest form of coverage. You select a term of coverage and death benefit (also called the face amount). The death benefit remains level, or the same, throughout the coverage period. The premium also stays the same. If you die at any point during the contract period, your beneficiary will receive the entire death benefit, whether you die in the first or final year of coverage.
The Two-Year Contestability Period
However, life insurance contracts have a two-year contestability period, which means that if you die within the first two years of coverage, the insurer can review the information you submitted on your application, and potentially deny the claim. For example, your claim would likely be denied if you didn’t disclose an issue relevant to the insurer’s risk—like a serious health condition. Most carriers will also deny a claim if an insured commits suicide during the first two years of coverage. The two-year contestability period applies to life insurance in general, not just level term policies.
Level Term Life Insurance vs. Decreasing Term Life Insurance
While level term policies pay the same death benefit throughout the term, the death benefit of a decreasing term policy gets lower throughout the coverage period. Typically, people purchase a decreasing term life insurance policy to cover a financial obligation that gets smaller every year. For example, you may buy a 30-year decreasing term life policy to cover a 30-year home mortgage. As you pay down the mortgage, the death benefit decreases also. But if you die during the coverage term, your beneficiary can use the policy’s death benefit to pay off the outstanding mortgage balance. Although decreasing term life policies reduce the death benefit over time, the premium remains the same throughout the contract period.
Types of Level Term Life Insurance
With a standard level term life insurance policy, your coverage ends at the end of the contract period and the insurer doesn’t return any of your premiums. But you can find term life policies that offer more flexible features.
Adjustable Premium Term Life Insurance
An adjustable premium term life policy allows the provider to offer an initial rate (premium) that may be lower than comparable term policies without this feature. But the insurer has the option to increase the rate during the term.
Convertible Term Life Insurance
Some term life insurance policies are convertible to permanent coverage. Convertible policies have a conversion period, which can vary among policies, during which you can convert to permanent life. When you convert, the carrier will base your new premium on your current age but won’t require you to submit new health information or take a medical examination. Since permanent life insurance policies offer lifetime coverage and build a cash value, you’ll likely pay a much higher premium after conversion.
Renewable Term Life Insurance
Some term life policies are renewable, allowing you to continue coverage for another term, once the original term expires. One advantage of a renewable term life policy is that you can renew your contract without having to submit to a medical examination. But, since age is a rating factor for life insurance, you’ll likely pay a higher rate after renewing.
Return of Premium Term Life Insurance
With most term life insurance policies, you don’t receive any money back when the coverage period ends. But some term life policies have a “return of premium rider,” or feature, which pays some or all of the total premiums you paid back to you, depending on the insurer. Typically, this feature only applies if you complete the policy term.
Other Types of Life Insurance
In the universe of life insurance, there are two general categories: term and permanent life insurance. Unlike term, permanent life insurance covers you throughout your life, as long as you pay the premiums. In order to last a lifetime, permanent life insurance policies build a tax-deferred cash value, which offsets the increasing cost of insurance as you age. But this feature can function as a sort of savings account as well: Once your policy builds a cash value, you can borrow against it or withdraw from it, without losing the death benefit. However, since part of your premium payment goes toward building the policy’s cash value, permanent life insurance costs more than term. The market offers several types of permanent life insurance policies, including:
Traditional whole life insurance: This type of policy offers a level death benefit, level premiums, and may pay dividends. Like other permanent policies, whole life earns a cash value that is accessible to the policy owner. Insurers offer a range of whole life insurance policies.Universal life insurance: Universal life policies are more flexible than whole life—you can change your premium payment, and even, potentially, increase the death benefit. Typically, policies earn a cash value based on a money market rate of interest. Universal life policies guarantee a minimum interest rate.Indexed universal life insurance: Instead of earning interest based on a money market rate of return, indexed universal life insurance bases policy earnings on an index of investments, such as the S&P 500. There is usually an upper and lower cap on the interest the cash value can earn.Variable life insurance: Variable life insurance lets you invest the cash value in stock market securities, via mutual funds in policy subaccounts. This enables you to grow the cash value more quickly than you would in a non-variable policy. But if your investments perform poorly, you can lose cash value and the death benefit could decrease.
