Level term life insurance: What it is and how to buy it
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Some people think that “term life” and “level term life” are the same thing. That’s not necessarily the case – and before you buy a policy, you should make sure you understand the difference. Otherwise, you could have premiums that go up every year, causing you to pay more than you expect. This article will help you understand your options by telling you about:
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Key features and benefits of a level term policy
These types of policies are sometimes referred to as “level premium” term life because that's what distinguishes them from other kinds of term coverage: payments don’t go up or down for the length of the term. Other prominent features include:
A limited protection term, typically lasting for 10, 15, 20, or 30 years – in contrast to whole or universal life, which provides permanent coverage.
If you pass away during the term, a death benefit is paid to your beneficiaries (typically your family).
The benefit is paid out in a lump sum and is typically income tax-free (unless paid for with pre-tax money).
As noted, your premium payments stay the same for the length of the term.
When the term expires, so does your life insurance protection. You either have to do without or get another policy.
Unlike permanent life insurance, all term policies are a pure life insurance product : there’s no cash value component to the policy. It’s designed to provide your family with an affordable death benefit – but again, only for a limited number of years.1
Customizing your policy with riders
Riders are optional provisions that can provide added protection and benefits.2 A term policy can last for up to 30 years, and a lot can happen in that time. Your health could unexpectedly change. You may lose your ability to work at some point. Riders can provide additional financial protection and support along the way, for an additional cost. Here’s how some popular riders work:
Term conversion rider - This lets you convert a term life insurance policy to a permanent policy with the same health rating for a specified period – so you won’t go through another medical exam. That’s important because if your health takes a turn for the worse, conversion help provide the protection you want for your family. All Guardian Level Term policies come with a provision letting you convert to a whole life policy for the first five years of the term. An Extended Conversion Rider (ECR) is also available, which lets you convert to a whole life policy for the entire length of the term.
Waiver of premium rider - If you become disabled and can’t work, this rider will pay your premiums, allowing you to keep your policy in effect.3 Guardian’s version of this rider includes a 7-year “own-occupation” definition, which means that even if you’re able to do some work, payments may be waived if you can’t work in your own profession or occupation. Guardian also offers an enhanced Waiver Plus rider: in conjunction with ECR (above), this lets you convert to a permanent policy while on disability – and your premiums may still be waived as long as the disability continues.
Guaranteed renewability rider or clause - Many term policies will let you renew your policy on a year-to-year basis after your term expires – but typically at a higher cost. Normally, it would be more economical to get a new term policy, but this can be useful for people who have been diagnosed with a serious or terminal disease near the end of their term and may not have other insurance options.
Accelerated death benefit rider – this rider allows policyholders to withdraw a portion of their death benefit while they are still alive, particularly during dire circumstances such as terminal, chronic, or critical illnesses. It can help manage immediate medical expenses, but utilizing these funds reduces the overall benefit available to beneficiaries.
Charitable Benefit Rider – This exclusive Guardian rider adds an extra 1% to your death benefit – up to a maximum of $100,000 – to be paid to the charity of your choice, over and above the amount paid to your designated beneficiaries.4
Why people consider it : Level term can be an option to consider if you’re getting life insurance primarily for income replacement, i.e., to get a death benefit that can replace part or all of the salary you would otherwise have earned to support your family. It can be an affordable way to get predictable payments and a large benefit – as long as you are fine with the fact that it lasts for a limited number of years.
Other kinds of life insurance policies available
Other term options are also available, but you may have to research a bit more to find them:
Yearly renewable term – These policies cover you for a year at a time, with an option to renew without a medical exam for the duration of the term – but at a higher cost each year. Compared to a level term policy, your payments will be slightly lower at first, but over the full term, you will typically pay more.
Return of premium – This type of policy actually pays back all or a portion of your premiums if you live to the end of the term.
Decreasing term – This is typically purchased to pay off a large business loan or mortgage if the borrower dies, with a premium and death benefit that decrease over time as the loan balance is paid off.
Guaranteed and simplified issued policies – Most life policies have an underwriting process in which the insurance company evaluates your age, health status, and other factors to determine your premium cost – and you’re required to have a medical exam. Guaranteed and simplified issue policies don’t need a medical exam, and typically only ask a few simple health questions. Premiums are generally higher because the insurance company must assume you’re a risky prospect with health problems. To keep costs affordable, these policies often feature a smaller death benefit and are generally sold to seniors for funeral and final expense coverage. If you have health problems and are looking for a larger death benefit, you may want to consider a conventional term policy with a medical exam, especially if your health issues are manageable.
Permanent life insurance options
Term policies aren’t the right choice for everyone, because they have two main drawbacks:
Your coverage is temporary – and when the term is up, you have to apply for a new policy with generally higher premiums (because you’re older) or go without.
There’s no cash value – after years of paying premiums, if you outlive the policy term, there’s no death benefit payout or financial benefit once the term is over.
Whole life and universal life policies are the two main types of permanent life insurance, so named because they provide protection that lasts your entire life. Unlike term, permanent policies are not a “pure insurance” product because they include a cash value component: A portion of the premium dollars can grow over time on a tax-deferred basis.5
Cash value can provide a number of benefits that you can use while you’re still alive. It takes a few years to grow into a useful amount, but once that happens, you can borrow money against your policy’s cash value, use it to pay your premiums, or even surrender it for cash in retirement.6
How do whole life and universal life differ7 ? Like a level term policy, whole life has premiums that stay the same – for life. A universal life policy gives you the flexibility to raise or lower your premiums within certain limits – but doing so can affect the size of your death benefit and cash value growth.8 With either permanent option, you should know that there is typically a cost difference compared to a term policy, especially early on. However, when you consider all the financial benefits – and the certainty of an eventual payout – you may feel a permanent policy meets your individual needs. Also, the choice doesn’t have to be an either/or proposition: Many people have one policy for permanent coverage and cash value purposes, then get an additional term policy to provide increased death benefit protection – for example, while children are growing up.
How to buy a policy
Start by thinking about how long you’ll need protection
If you’re getting life insurance for income replacement to protect your family’s finances, you should consider a term long enough to see your children out of the house and through college. The longer your term, the more you’ll typically pay each month. Nevertheless, you may want to err on the side of a longer term. Here’s why.
Let’s say a 10-year policy costs $600/year, and a 20-year policy for the same amount is $900/year. You may be tempted to get the cheaper 10-year policy now, then another 10-year policy if you need it later. But if you believe your family needs protection for 20 years, how likely is it that in 10 years you’ll decide protection isn’t necessary? You may end up paying more if you get two consecutive policies.
The higher your age, the more you typically pay for life insurance. In 10 years, you’ll be an older applicant who may well have been diagnosed with a health issue, such as high blood pressure. Even if it’s under control, your premiums for a new policy could increase. This type of scenario is quite common – and over 20 years, you typically end up paying more by opting for two 10-year term policies.
Estimate your coverage amount
It’s always a good idea to talk with an financial professional who can not only help calculate your need but guide you to the right coverage solution for your situation. But if you’re looking for a starting point, here are a few general rules for determining your coverage need :
Consider 10x your salary - This is one of the simplest rules of thumb, and it can help provide a useful cushion for your family – but it doesn’t take all your actual needs into account.
Consider 10x your salary, plus college expenses - That can help ensure they can have the education you want for them.
Consider the DIME formula - DIME stands for Debt, Income, Mortgage, and Education. Total your debts, mortgage, and college expenses, plus your salary for the number of years your family needs protection (e.g., until the children are out of the house).
Human Life Value
Some financial professionals calculate the amount you need using the Human Life Value philosophy, which is your lifetime income potential: what you’re earning now, and what you expect to earn in the future. In its simplest form, the philosophy suggests that you multiply your income by a variable based on factors such as age, occupation, projected working years, and current benefits.
As with every individual, the amount of recommended insurance you purchase depends on many factors. A simple way to get that number, however, is to multiply your salary times 30 if you are between the ages of 18 and 40. The calculation changes based on your age group, so please refer to the chart:
Age | Insurance Amount |
|---|---|
18-40 | 30 times income |
41-50 | 20 times income |
51-60 | 15 times income |
61-65 | 10 times income |
66-70 | 1 times net worth |
71-75 | 1/2 times net worth |
Start by seeing if you can get coverage at work: Whatever amount of coverage you decide to get, you may be pleasantly surprised by how affordable life insurance can be. People often overestimate the cost, but a healthy 30-year-old male can get a $1,000,000 Guardian Level Term policy for 20 years, with a monthly premium of just $61.
Many employers offer group life insurance, either as a mandatory (employer-paid) or voluntary (employee-paid) benefit. Either way, it can be a way to start getting protection, because group premiums are typically lower than those for individuals. You may also be able to get a group policy through a member association. However, the total amount of coverage available may be limited, for example, up to 3 times your salary. And if you leave the company, you could lose your coverage unless it is portable.
Round out your protection with an individual policy
Even if you have some coverage through work, it may not be enough for your needs – but level term life can be easy to shop for and get. Many companies, including Guardian, make it simple to compare rates by giving you an instant online quote. Before choosing a company, look for two things:
Financial strength - You want to be confident that the company will be around when your family needs a payout years down the road. So, look for insurers with strong Financial Strength Ratings, like Guardian.9
Get quotes from many types of providers
Some insurance companies, like Guardian, write their own policies. Other companies sell policies from other insurance carriers. Make sure you understand how the company you are considering is structured.
One final note
Even though level term is one of the simplest forms of life insurance coverage, it helps to talk things over with a knowledgeable professional before you buy. If you don’t know such a person, Guardian can connect you with a financial professional who will listen to your needs, find solutions within your budget, and help you decide. Whichever way you buy, consider doing it soon. Remember: the longer you wait to get life insurance, the more you’re typically likely to pay.