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.
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.
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!