Level Term Life Information

Level term life insurance is temporary insurance. Life insurance companies sell level term life because it is a less expensive alternative to permanent whole life and universal life policies. While level term life insurance does not have a cash savings account like a permanent plan, it does provide the beneficiary with a death benefit that can be used in any way he or she deems necessary. Level term life policies can vary in length but will normally be purchased for a term length of five to 30 years.

The premium for a level term life policy is the same each year the policy is in force. No matter the length of the term, the premium remains the same and will not increase. The total cost of the policy is averaged over the length of the term and the amount of the death benefit.

The premium paid by the level term insurance policyholder goes toward the death benefit only. This is different than a permanent life policy, for which a portion of the premium is applied to the cash-building account. A level term life policy is known as a “single benefit” policy. The only payment made by the insurance company is to the beneficiary when the policy matures upon the death of the policyholder.

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Term Life Compared to Annual Renewable Term Life

The length of the term for an annual renewable term policy is one year. The premium is for that year only and will increase if the policyholder renews the policy at the end of the term. Insurance companies calculate the premium based on the cost of insuring the policyholder for 12 months. While 12 months may not seem like a big age difference, a 69-year-old is more expensive to insure than is a 68-year-old. As the insured ages, the risk to the insurance company increases because there is a higher likelihood of paying the death benefit. For example, a 68-year-old man who paid $900 for one year of term life coverage may pay $950 for one year of coverage when he renews the policy at age 69.

A policy with an annual renewable term reflects only the cost of providing the insurance for one 12-month period. A level term policy averages the cost of the insurance over the duration of the term. For example, if the cost of the insurance during the first year is $800 and the final year is $1,000, the level term premium might be set at $900. The insured might overpay early in the term but underpay later. While a level term life policy with an annual renewable term can make sense in some cases, most people are advised to purchase a policy with the longest available term at the time of issue.

Why Choose Level Term Life Over Permanent Life

Whole life insurance is a kind of permanent life insurance. Whole life insurance is in force for a person’s entire, or “whole” life, as long as the premiums are paid when due. Whole life contains a cash account that grows tax-deferred. It is, then, part insurance and part investment product, with part of the premium going toward the cost of the insurance and part going toward the investment.

Like premiums for all life insurance products, those for level term life are less expensive for young and healthy applicants. While some states mandate that level term life insurance rates must be the same for men and women of the same age in the same risk class, in most states men will pay more for level term life coverage. Tobacco users, including cigarette and cigar smokers of either sex will always pay higher premiums. Premiums for level term life insurance policies typically increase substantially as people get older. For this reason, most insurance companies allow level term life policyholders to convert their policies to whole life policies prior to the end of the term.

Policyholders concerned about a lack of return if they outlive the term may wish to consider a type of level term policy known as return-of-premium (ROP). With a return-of-premium policy, the premiums paid in over the years are returned to the policyholder if he or she survives the term. If the policyholder dies within the term, his or her beneficiary is paid the death benefit. ROP term insurance is best explained as a wrapper around an underlying level term policy. Premiums are usually higher than they are for a standard level term policy but they are returned at the end of the term.

Why Choose Level Term Life Insurance

Many of those looking for level term life insurance find that a term policy suits their needs not only because term insurance is easy to understand, but because it is affordable. It is best suited for young couples with or without children who want to make sure that the surviving spouse will not suffer a reduction in his or her standard of living if one income is lost. For those with children, the financial cushion provided by the death benefit can cover school fees, transportation costs or simple day-to-day living costs.

Level term life insurance can also be a very good choice for an older person in his or her fifties, sixties or seventies. A senior who wishes to leave money for a grandchild’s college tuition, or one who wants to make sure that his or her family is not left to cover funeral and burial expenses out of pocket may choose a level term policy. The beneficiary can also use the death benefit to pay any estate taxes that might be due.

The optimal level term and amount of the death benefit will be different for each individual. For example, a 30-year-old man with a wife and a two-year-old child might consider a 20-year term policy. This amount of time might be enough to cover the child’s education costs, cover mortgage or rent payments while the child is living at home, and otherwise provide the day-to-day living costs for wife and child.

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