What Is 10-Year Level Term Life Insurance?
Life insurance is a contract between you and an insurance company. The insurer promises to pay a sum of money on your death to beneficiaries you specify. The simplest of life insurance policies is term life insurance. Some term policies use an increasing premium amount from year to year. However, another kind of term policy is a 10-year level term policy.
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Death Benefit
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The death benefit of the policy is chosen when you fill out the application for insurance. This dollar amount reflects what your beneficiaries will receive. This amount will not change during the term of the policy in most cases (unless it is a decreasing term policy).
Pure Cost of Insurance
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The pure cost of insurance is the cost necessary to pay for the death benefit. This cost is built into the premiums for the 10-year level term policy. This cost increases every year to reflect the mortality costs associated with providing insurance coverage.
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Level Term Funding
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The level, or unchanging, premium is possible because the insurance company overcharges for the pure cost of insurance in the early years of the policy. It then invests excess premium to hold down the future cost of insurance, which is guaranteed to rise as you become older. In this way, your premium is able to stay level and you are able to afford coverage for a set term.
Significance
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Level term funding allows you to buy insurance when it otherwise might not be affordable. Because excess premium is collected, the insurance company can set the price in advance so that you don't need to worry about whether you can afford the policy.
Misconceptions
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A common misconception made by both insurance agents and consumers is that a 10-year level term policy represents paying for the pure cost of insurance. The only policy type that pays for pure insurance coverage only (or, pure death benefit coverage) is an annual renewable term life insurance policy. All other policies that use a level premium charge excess premium to build a cash reserve used to hold down the future cost of insurance. Some policies, like cash value policies, make this reserve available to the policy owner and charge higher premiums than term policies, which have no cash value associated with them for the policy owner.
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