What is Level Term Life Insurance and How It Works?
It is common knowledge that level term life insurance is cheap compared to other insurance products because you can purchase a lot more at a relatively low cost.
Level term life insurance is the best choice for your financial needs, such as paying your mortgage or paying your child’s college fee. Such insurance products give more than just death benefits to people.
What Is Level Term Life Insurance?
It provides coverage at affordable rates to people and families. Level-term life insurance is usually for young families with a huge debt and needs protection if their primary earner suddenly dies.
The characteristics of Level Term policies that differ from other types of life insurance:
- The policy period is usually from five to thirty years.
- The premium remains consistent during the policy period once issued.
- The death benefits remain constant during the policy period once issued.
- The policy doesn’t provide any cash component that receives interest.
Level term is the most popular kind, but there are other life insurance types, such as decreasing term or renewable term. Decreasing term insurance provides coverage to personal debt, where the coverage decreases with the decrease of debt. However, renewable term offers the same coverage as a level term, but the policy period is typically one year.
What Is the Difference Between Level Term and Whole Life Insurance?
The only common characteristic between level term and whole life insurance is that the premium and benefit gained after death is fixed at the time of policy issuance. Also, level term life insurance is quite cheaper than whole life insurance.
Whole life insurance provides coverage to the insurer’s lifetime, whereas term insurance is for a specific period. Whole life insurance places a specific portion of the premium in an account that accumulates interest; on the other hand, term insurance earns no cash value. People buy Level term to pay for the debts and whole life insurance to make assets for wealth accumulation.
How Does Level Term Life Insurance Works?
The policies offered by the level term life insurance are straightforward and are almost fixed. Every company offers the same fixed characteristics that include:
- The death benefit remains consistent throughout the policy.
- The premiums remain consistent throughout the life of the policy.
- The policy doesn’t earn any cash value component.
- The policy expires at the preselected terms.
Typically, every life insurance policy requires underwriting, which consists of; application form with your life and health-related questions, medical exam, or electronic reports.
Remember that almost every life insurance product will require reports from the Medical Information Bureau (MIB), the Prescription Drug database, and your driving history of the last three to five years before the policy issuance.
As the underwriting process finishes, your application is sorted based on assigned health classification, and based on results, your insurance rate is calculated. The amount of life insurance you apply for and the time period you need a policy affect your insurance rate. For instance, a thirty-year policy will have higher rates than a ten-year policy because of longer risk exposure.
Finally, the cost of any optional riders you choose to add to your policy affects the rate of a level-term life insurance policy.
The Pros and Cons of Level Term Life Insurance
We can say that everything has its pros and cons. But here, the pros and cons have nothing to do with insurance policy. Rather it depends on the need of the policyholder.
Thus, level term life insurance is the best option available for a person who is looking to replace their income, but on the other hand, it is not for an applicant who wants lifetime coverage. It provides affordable coverage for your mortgage debt. Level term insurance also provides coverage temporarily.
The cons of level term insurance include that it doesn’t cover for policy holder’s lifetime. It doesn’t save for significant expenses such as college fees. It also doesn’t save money for the retirement income of the policyholder.
