Understanding Level Term Life Insurance

When it comes to term life insurance, level benefits that don’t change over time is the key feature.

What is level term life insurance?

A level term life policy is a type of life insurance that provides coverage for a specified term, typically 10, 15, 20, or 30 years. During this period, the death benefit remains constant, or "level," meaning it does not decrease over time. In most cases, the premium that you pay each month also remains constant – these are known as level premium term life insurance policies.

Most term life policies are in fact structured to be level, but there are some carriers that may offer different options like decreasing term life insurance. In contrast to level term insurance, decreasing term life insurance policies have a death benefit that decreases over time. These policies are often used to cover specific debts (like a mortgage) that decrease over the years. The assumption is that you won’t need as much of a benefit to cover the debt as you continue to pay it down year after year.

Like all financial decisions, determining if a level term life policy is best for you depends on a number of factors including your current financial situation and what your goals are. Learn more about how a level term policy works, and how it compares to other types of life insurance.

How does level term life insurance work?

Level term life insurance is a subset of term life insurance that provides coverage for a specified period (the term), with the main feature being its fixed death benefit. If you’re interested in getting a level term life policy, the process is fairly straightforward.

1. Choose your policy term: Think about your needs and the desired coverage period. Common terms include 10, 15, 20, or 30 years. If you die during your chosen period, your beneficiaries will receive the death benefit. If you survive the term, your coverage expires, and there is no death benefit payout.
2. Determine the death benefit amount: This is the amount of money that will be paid out to your beneficiaries if you die during the policy term. This amount remains constant throughout the level term life policy. When choosing the ideal death benefit amount, think about how much debt you have or how much funding it would take for your loved ones to cover expenses and maintain their quality of life.
3. Begin paying premiums: For level premium term life insurance policies, you’ll pay the same amount throughout the entire term. The premium is set by the insurance company and based on factors such as your age, health, and the chosen coverage amount. If you open the policy when you are young and healthy, you can lock in a lower premium.

One thing to remember about a level term life policy is that there is no cash value. In other words, as opposed to whole life or universal life insurance, if you cancel the policy before death, there will be nothing to cash out since cash value does not accrue.

At the end of the term, you may have the option to renew. Just keep in mind that the premiums for renewal are often significantly higher. If you think you may want a longer term, it may be better to choose that up front.

In the event that you do pass away during the term, your beneficiaries can file a claim with the insurance company. Once the claim is verified, the death benefit is typically paid out to the beneficiaries tax-free.

Should I get a level term life policy?

The type of life insurance that you get is really a personal decision, but there are some situations for which a level term life policy makes sense. For instance, level term life insurance is often chosen by individuals who want coverage during specific high-risk periods, such as when they have dependents or large financial obligations. So if you have young children and own a home, you might be a good candidate for this type of policy. 

Being able to help ensure that your loved ones are financially protected in the event of your death can offer peace of mind, and a level term policy provides a straightforward and predictable form of coverage. In addition, level term life insurance is often more affordable than permanent life insurance because it doesn't include the cash value component.

What is the best term to choose for a level term policy?

The best term length for life insurance depends on your individual circumstances and financial goals. When selecting a term length for your life insurance policy, consider the following factors:

• Financial responsibilities: If you have dependents, a mortgage, or other significant debts, you might want a term that covers the years during which these financial obligations are most significant.
• Family needs: If you have young children, you might want a policy that provides coverage until they are financially independent or until you've paid off major debts.
• Career stage: If you're early in your career and have several decades of income-earning potential ahead, you might opt for a longer term. If you're closer to retirement, a shorter term may be sufficient.
• Health and age: The cost of life insurance tends to increase with age, and health conditions can impact insurability. If you're in good health, you might consider a longer term to lock in lower premiums.
• Financial goals: Consider your long-term financial goals. If you're saving for retirement and building wealth, you may need life insurance for a shorter term. If you have ongoing financial responsibilities, a longer term may be more appropriate.
• Budget: Evaluate your budget and determine how much you can afford in terms of premiums. A shorter term may have lower premiums, but a longer term can provide extended coverage.

Explore life insurance options

Getting a life insurance policy can be an important part of your financial planning. For many people, a level term life policy is ideal thanks to its simple structure and customizable nature. Get in touch with Ethos to discuss your life insurance goals and find the right policy for you.