Cost & Coverage
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Most people shopping for life insurance need term life insurance. This type of life insurance, which expires after a predetermined number of years (the “term”) is affordable and straightforward: You pay regular premiums, and if you die over the course of the term a death benefit is paid out to your loved ones. If you outlive the term, the policy expires and you stop paying.
However, while term life is the simplest form of life insurance, there are different versions of it. Many people buying term life insurance are actually buying level term life insurance, an important distinction that guarantees you pay the same price for your policy no matter how long it’s active.
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A term life policy guarantees that the premium remains the same for the duration of the contract. This is what most people refer to as term life. Purchased for a set number of years (5, 10, 30 years, for example), the premium and the death benefit remains the same (level) until the end of the term. Many of these policies can be converted to a permanent policy at the end of the term, or can be canceled at any time.
Level term life insurance, like all term policies, lasts for a set period of time before it expires. The word “level” is what’s key in the definition: The premium rate for the policy stays the same, or level, for the entire life of the policy. The death benefit also stays the same.
When people mention term life insurance generically, they usually mean level term insurance. It’s the most common form because of its simplicity; the policyholder doesn’t have to worry about the premiums varying from month to month or year to year. They don’t have to worry about the death benefit changing from the policy’s inception to its expiration, and there is no cash value or fees to take into account.
For anyone looking for a basic financial safety net to ensure that their loved ones are secure in the event of the death of the primary breadwinner, level term life insurance is the best option. It’s also the most common policy offered by life insurance companies, so it’s easy to compare quotes and get the best rate.
Level term life insurance follows the same basic process as other life insurance policies:
Terms typically last anywhere from 10 to 30 years. The flat premium makes for predictable payments, as opposed to annual renewable or decreasing term policies, which have elements that are variable over time.
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Aside from a traditional term life policy, you can choose from annual renewable or decreasing term life insurance, which are term policies that aren't as straightforward. Each come with their own stipulations that makes them less cost-effective than a level term life policy.
Annual renewable life insurance is a type of term life policy — but the term is only one year. After that year is up, it’s renewable for a certain number of years (outlined in the policy). While it’s initially cheaper than a comparable level term policy, it gets more expensive each time it’s renewed. Over the life of the policy, you’ll end up paying higher premiums for the same amount of coverage.
Here’s how level term and annual renewable life insurance compare:
|Level Term Overview||Annual Renewable Overview|
|Duration||1-30 years||1 year, renewable for set number of years|
|Guaranteed Death Benefit||Yes||Yes|
|Guaranteed Cash Value||No||No|
|How Cash Grows (or Shrinks)||-||-|
|Premiums||Guaranteed to remain level||Increases each year policy is renewed|
|Notes||Best option if you'll need coverage for a number of years||Cheaper initially, but more expensive later. Best for short coverage period|
Another type of term life insurance is decreasing term insurance. It also lasts for a set number of years, and while the premiums stay the same, the death benefit decreases over time, which essentially means that you’re paying the same for less coverage. A decreasing term policy is commonly seen in mortgage protection insurance, in which the death benefit is pegged to your remaining mortgage rather than staying level.
Here’s how level term and decreasing term life insurance compare:
|Level Term Overview||Decreasing Term Overview|
|Duration||1-30 years||1-30 years|
|Guaranteed Death Benefit||Yes||Yes, but death benefit decreases over time, per terms of policy|
|Guaranteed Cash Value||No||No|
|How Cash Grows (or Shrinks)||-||-|
|Premiums||Guaranteed to remain level||Guaranteed to remain level, even as death benefit decreases|
|Notes||Best option if you'll need coverage for a number of years||Most often purchased as mortgage insurance through a bank|
When the term of your level term policy ends, the policy expires. When that happens, you have a few choices:
The main difference between term and whole life policies are:
Unlike level term life insurance, permanent life insurance won’t necessarily have a level premium. For example, with whole life insurance you can use the cash value to pay premiums so the amount you pay out of pocket is less; with universal life insurance, premiums can go up or down depending on the interest earned on the policy’s cash value.
Learn more about the differences between term and whole life insurance.
In the end, level term insurance wins out over other types of term insurance and permanent insurance because of its price and simplicity. This is why most people choose it as their form of financial protection.
Level term life insurance has several pros, and a few cons, compared to other types of life insurance:
As mentioned, the cost of level term life insurance is 1) relatively cheap and 2) consistent over the term length. Here’s what a 20-year level term policy would cost a healthy 30-year-old male in New Jersey, on average, at different death benefit amounts (insurance companies typically offer a slight discount for paying premiums annually versus monthly).
|Benefit Amount||Annual Payment||Monthly Payment|
Note that even for affordable level term policies, the cost of life insurance increases with age, rising an average of 8-10% a year. If you need to buy life insurance, now is the best time. You can learn more about life insurance rates by age to see how much delaying your purchase will cost you in the long run.
Riders are like mini-contracts appended to a policy that allow you to customize it to fit your needs. For instance, you can add an accelerated death benefit rider that allows you to access the death benefit early in the event of a terminal illness diagnosis, or one that provides a small level of coverage for your children.
Some riders are included by default on policies, while some cost extra and can raise rates. You should see what life insurance riders are available to you and ask a licensed agent or the life insurance company how much one might cost before making your final decision.
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