What Is a Level Premium Term Life Insurance Policy?
Level premium term life insurance is the most popular kind of term life insurance, by far, in the United States. Level term life insurance allows you to buy life insurance without worrying about whether your premiums will go up or down. Before you purchase a level term policy, however, it might be helpful to understand how this policy works.
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Definition of Level Term Funding
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A level premium term life insurance policy has premiums that stay level for the duration of the term of the policy. This is done by using a premium funding option called "level term funding." Level term funding inflates the true cost of insurance and levels out the premium so that the insured pays more than the actual cost of the death benefit in early policy years and less than the cost of pure insurance in later policy years.
Investment Factor
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To keep premiums level, the insurance company must charge more than the pure cost of insurance in the early years of the term policy. Part of the premium, the amount over and above the pure cost of insurance, is then invested so that term premiums can remain level as the pure cost of insurance increases over time. This investment factor actually helps to hold down the future cost of insurance even though it is initially more expensive than paying for just the pure cost of insurance.
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Types of Level Premium Term Life Insurance Policies
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Level term life insurance policies are very common. Even though they use level term funding strategies, the premiums are relatively inexpensive. Common types of level premium term life insurance include five-, 10-, 15-, 20- and 30-year term life.
Considerations
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When considering whether you should purchase a level premium term life insurance policy, compare it to the cost of buying pure insurance, also called "annual renewable term life insurance." Over time, the annual renewable term life insurance will always have substantially higher premiums than a level premium term life policy; however, if you only need a policy for a very short time (less than five years), it could make sense to purchase pure insurance coverage.
Misconceptions
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A common misconception about level premium term life insurance is that the insured is paying for just the pure cost of insurance. This is not true. Level premium term life needs to have an investment component, as described earlier, to offset the inherently rising mortality charges associated with life insurance as you grow older. Even so, level premium term life insurance actually decreases in terms of real cost over time, despite the fact that premiums are initially inflated over the pure insurance cost.
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