What is Level
Term Life Insurance?
Term life is the most basic type of life insurance policy.
It provides coverage in case you die but is temporary only
and builds no cash value. There are several variations of
term insurance but the most popular type of term policy is
level term life or guaranteed level term.
Instant Term Life Insurance
Quote
How Does Level Term Life Work?
The concept of level term is
simple. The life insurance company agrees to provide
guaranteed coverage (death benefit) at a fixed price
(guaranteed premium) for a certain period of time (level
term). During this period, coverage and premiums are
guaranteed to remain level. However, once the initial
level term period expires, rates generally begin to increase
on an annual basis.
Just like ordinary term insurance,
rates for level term insurance are determined based on
your age, gender, health history and tobacco use. The
cheapest guaranteed fixed term policies are the 10-year
level term plans.
Also available are 15, 20, 25 and 30 year level term
options. As you extend the level period, policy costs
begin to increase because the insurance company is “on
the hook” at a fixed rate for a longer time period.
For example, assuming a similar face amount of coverage
at the same age, a 20-year
level term policy can
be as much as double the cost of the10-year guaranteed
alternative. Additionally, depending upon your age, a 30-year
term policy can be 3-4 times more expensive
At the end of your initial term period, some companies
may allow you to extend your policy for another specified
level period but this almost always requires proof of
good health. In most cases, however, at the end of the
initial level term period, the policy becomes annual
renewable term and rates increase each year
as you get older. In these cases, premiums can quickly
become cost prohibitive. The good news is that if you
are in acceptable health, you can always qualify for
a better rate by shopping the marketplace for a new policy.
If you cannot qualify medically for a new policy, there
is a real concern with level term insurance becoming
cost prohibitive but most policies are still renewable
(at an ever increasing rate) to age 95.
Bridge the Gap with Fixed Term Insurance
Level term insurance should
be used as a temporary bridge that
provides low cost protection during
the period of need but can be dropped
or expires at the point when the
coverage no longer becomes necessary.
It is ideal for situations where
you need to maintain coverage for
a temporary time period. For example,
if you are 45 years old and earn
$100,000 annual income and want
to work to your age 65, you may want to protect
your potential earnings to retirement by purchasing a 20-year level term policy for $2,000,000.
Another great use for level term would be for mortgage
life insurance. If
you had a $75,000 mortgage with 15 years remaining, you could secure a 15-year
level term policy to pay off your home in the event of your death. There are
Level
Term Doesn’t Build Cash Value or
Does It?
One of the main reasons why level term
is so inexpensive and quite frankly so popular is that
term insurance historically build no cash value. With
most level term life plans, you pay for pure insurance
protection only thereby saving thousands of dollars over
more costly whole life or universal life alternatives.
These lower premiums can be used at your discretion giving
you control over your insurance dollar.
More recently, a new type of level term insurance policy
has evolved known as return
of premium term life insurance. This insurance, commonly
referred to as ROP term or money back term, provides
for a 100% premium refund if coverage is maintained until
the end of the initial level term period. Unlike traditional
term insurance, ROP policies build cash value and are
a great alternative if you don’t mind paying a
little higher premium for the guarantee of all your premiums
back if you outlive the level coverage period. For more
details see, Level
Term Insurance versus ROP Term.
Level Term Life Insurance and Conversion Options
Most level term policies offer a valuable feature called
a conversion option. The conversion option is very important
because it protects your insurability. It gives you an
option to “exchange” your term policy for
a more permanent policy even if you are in declining
health or uninsurable. The cost to convert to a whole
life policy is expensive but having the option to “lock
in” a longer guaranteed rate without proof of health
can be invaluable. With most insurance companies, the
conversion period corresponds to the level term period.
However, some of the more reputable companies have conversion
privileges that extend to age 75 regardless of the initial
level term period.
Summary
Level term insurance is extremely popular because it
is inexpensive and can be purchased at guaranteed rates.
It is a great way to protect temporary needs that will
eventually go away such as mortgages or other loan balances
or obligations. Level term may be a great fit for you
depending on your circumstances. For more details
or for a personalized quote, call MEG
Financial today at (877) 583-3955. We can help
you make the right term policy choice!
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