Level-term life insurance is a type of policy that provides a fixed death benefit as long as consistent premiums are met and paid over a specified period. This insurance type offers financial protection for your loved ones and guarantees that the pay-out remains the same throughout the policy’s duration.
Understanding which life insurance type is right for you can be hard with so many available, which is why, in this article, we’ll be exploring:
- What level-term life insurance is
- What the features and benefits are
- How to know if it’s the right insurance choice for you
- The pros and cons of level-term life insurance
Let’s demystify level-term life insurance, and ensure that you have a comprehensive understanding of the plan to see if you want to take out a plan.
Defining Level-Term Life Insurance
Level-term life insurance is a type of life insurance policy that provides coverage for a specified term, often 10, 20, or 30 years. During the policy term, the death benefit remains constant, meaning that the payout to beneficiaries will not change – so if the policyholder passes away during the specified term, the beneficiaries will receive the predetermined death benefit, which is typically tax-free.
Policyholders will need to pay regular premiums, typically on a monthly or annual basis, to keep the policy in play. If the policyholder dies within the term, and the payment terms have been met until this point, the insurance company then pays out the death benefit to the beneficiaries as named in the policy.
Level-term life insurance does not have a cash value component or investment feature like some other life insurance plans such as whole life – instead, the primary purpose of level-term life insurance is to provide a fixed death benefit to protect the policyholder’s loved ones in the event of their untimely passing to help with a range of end-of-life expenses and other fees.
The Primary Purpose of Level-Term Life Insurance
The primary purpose of level-term life insurance is to offer financial protection to the policyholder’s beneficiaries in the event of the policyholder’s death. It can be used as an income replacement mechanism, helping with outstanding debt coverage such as mortgages, loans or credit card balances to prevent financial burdens from being placed on those left behind – especially pertinent if the policyholder is the household’s main income provider.
The payout can also be used to help with final life expenses, such as funeral costs and end-of-life arrangements. It can also be useful when considering estate planning to ensure that assets are protected and passed on smoothly.
Key Features of Level-Term Life Insurance
Level-term life insurance policies usually have level premiums, meaning the premium amount remains constant throughout the policy term. This predictability makes it easier for policyholders to budget and plan for their insurance expenses – this is not always the case with other life insurance policies, as some premiums can fluctuate based on market conditions, rendering some plans unaffordable over long time periods.
Level-term life insurance policies provide coverage for a specific term, which can vary but is often 10, 20, or 30 years. If the policyholder passes away during the term, the death benefit is paid out to the beneficiaries – although, if the policyholder outlives the term, the coverage expires, and no benefit is paid which is an important factor to bear in mind when considering this policy type.
If the passing falls within the policy term, then a death benefit is offered, which is the amount paid to beneficiaries upon the policyholder’s death. The death benefit is typically tax-free and can be used to cover various expenses, such as outstanding debts, funeral costs or income replacement for the family or dependents.
Unlike other life insurance types, level-term life insurance policies do not accumulate a cash value or provide investment opportunities. They are pure protection policies, designed solely to provide a death benefit, making them far simpler to understand than some other, more complex plans, like whole life insurance.
Differences from Other Life Insurance Types
Let’s now take a look at the main differences between level-term life insurance and other life insurance types available on the market.
Level-Term vs. Whole Life Insurance
The primary difference between level-term life insurance and whole life insurance is the duration and cash value. Level-term is temporary and does not build cash value, while whole life provides lifelong coverage with a cash value component that can be used for loans or withdrawals.
Whole life insurance is useful for maintaining a cash payout at any time, whereas level-term insurance just covers a specific time period, and if the death occurs outside of this timeframe, no payout will be received.
Term vs. Universal Life Insurance
Universal life insurance offers flexibility in premium payments and death benefits, allowing policyholders to adjust coverage and contributions. Term life has fixed premiums and coverage for a set term, making it simpler, but less flexible.
Term life insurance is often more affordable than whole life or universal life insurance. This makes it an attractive option for individuals seeking pure protection without the added cost of cash value accumulation.
Short-Term vs. Long-Term Needs
Term life insurance is well-suited for covering short-term financial needs, such as providing for young dependents or paying off a mortgage. Whole and universal life insurance are better suited for long-term financial planning, estate preservation and legacy goals.
Guaranteed vs. Lifelong Coverage
Term life insurance guarantees coverage for a specific term, making it ideal for individuals who want protection during their working years. Whole life and universal life policies offer coverage for life, ensuring a lifelong safety net.
Coverage Amount and Duration of Level-Term Life Insurance
With level-term life insurance, policyholders determine the coverage amount, often referred to as the death benefit, based on their specific financial obligations, goals, and the needs of their beneficiaries.
To select the right amount, you should make sure you consider:
- Income replacement – calculate the amount your loved ones would need to replace your income if you were no longer around. This may include considering the number of dependents, their ages, and your spouse’s income, if applicable
- Debt and financial obligations – evaluate existing debts and financial obligations, such as mortgages, loans, or other outstanding balances. The coverage should be sufficient to pay off these debts, preventing the burden from falling on your loved ones
- Future financial goals – identify long-term financial goals, such as saving for your children’s education or ensuring a comfortable retirement. Life insurance can help meet these objectives if you factor them into your coverage amount
Policyholders can also select the term length, which represents the number of years the policy provides coverage.
When choosing the term length, you should consider:
- Short-term vs. long-term needs – assess whether you need coverage for a specific short-term period, like the duration of a mortgage or until your children reach financial independence. Longer terms may be necessary if you have long-term financial obligations, such as supporting young children through their education
- Budget and affordability – your budget and financial capabilities play a role in selecting the term length. Longer terms may have higher premiums, so choose a term that aligns with your budget
- Life stages – life insurance needs can change as your life circumstances evolve. Select a term length that coincides with key life events or milestones
Level-Term Life Insurance Premium Structure
Level-term life insurance is characterised by its level premiums, which means the premium amount remains constant throughout the policy’s term.
Here’s how this works:
- Fixed-rate – when you purchase a level-term insurance policy, the insurance company calculates your premium based on factors such as your age, health, coverage amount, and the policy term. Once this rate is determined, it remains fixed for the entire term of the policy
- Predictable budgeting – this predictability is advantageous for policyholders as it allows them to budget with confidence, knowing that the premium amount will not increase as they age. This makes it easier to plan for insurance expenses
- Premium stability – premium stability is ideal for individuals who want a straightforward and cost-effective insurance solution. Policyholders pay the same amount every month or year, regardless of inflation, changes in health, or other factors that typically affect premium costs
Factors Influencing Premium Calculation in Level-Term Life Insurance Plans
Several factors influence how the premium is calculated for a level-term life insurance policy:
- Age – the age of the policyholder at the time of purchasing the policy is a significant factor. Younger individuals generally pay lower premiums because they pose a lower risk of passing away during the policy term
- Health status – your health plays a crucial role in premium calculation. Insurance companies assess your health through a medical underwriting process, which may include a medical exam and a review of your medical history. Those in better health typically receive lower premiums
- Coverage amount – the death benefit or coverage amount you choose impacts your premium. Higher coverage amounts will result in higher premiums, as the insurance company assumes a greater financial risk
- Policy term – the length of the policy term affects the premium. Shorter terms often have lower premiums, while longer terms may have slightly higher premiums due to the extended duration of coverage
- Gender – in some cases, gender can influence premium calculation. Statistically, women tend to live longer than men, which can lead to lower premiums for female policyholders
- Smoking and lifestyle choices – smoking and certain lifestyle choices, such as engaging in high-risk activities, can lead to higher premiums as they increase the risk of premature death
- Riders and supplementary coverage – adding riders or supplementary coverage options to your policy will increase your premium. These additional benefits can enhance your coverage but come at an extra cost
Who Should Consider Level-Term Life Insurance
Level-term insurance typically suits individuals or families who prioritise straightforward, cost-effective life insurance coverage.
This type of insurance is well-suited for:
- Young families – level-term insurance is ideal for young families with dependents who need financial protection if the primary breadwinner were to pass away. It provides a straightforward solution to ensure that the family’s immediate and short-term financial needs are met
- Homeowners – homeowners often choose level-term insurance to provide coverage during the years of their mortgage. This ensures that the family can continue living in their home without the threat of foreclosure if the policyholder dies
- Budget-conscious individuals – level-term insurance is often more affordable than other types of life insurance, making it a popular choice for individuals who seek protection without the added cost of cash value accumulation or long-term coverage
- Individuals with specific financial goals – those with specific financial goals, such as funding their children’s education or paying off a particular debt (e.g., student loans), may find level-term insurance aligns well with their objectives
Level-term insurance is a versatile choice that suits a range of life stages and financial goals, providing straightforward and cost-effective protection when needed most. It’s particularly beneficial for those who want to secure short-term financial needs and safeguard their family’s immediate future.