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Level Term Life Insurance
The most popular type of life insurance is level premium term life. This is just one variant of many types of term life insurance, which include renewable term life, decreasing term life, convertible term life, and return of premium. Level term insurance offers temporary coverage for periods of 10-30 years. An annual or monthly premium is determined at contract signing based on the age and health of the policy owner. Level term life insurance differs from related term products in that it offers constant, as opposed to rising, premiums.
Marry and Tom are both career professionals in their early 30’s earning middle class salaries. Two years ago Marry had a child and now she’s back at work. Although Tom and Marry make enough income to pay for mortgage and childcare, if one of them dies, the other would have a hard making ends meet; so they decide to buy life insurance. Marry and Tom want temporary insurance, figuring they only need 15 years of coverage while the young family is most vulnerable. They decide to get $500,000 of protection at a fixed annual price because they don’t want to deal with increases every year. After 15 years the term will end and coverage will expire. By that time either parent should make enough income to cover expenses if the other were to die.
The key feature of level term life insurance is the fixed annual premium. Most other term products feature premiums that increase every year a fact driven by rising mortality charges due to increased likelihood of death as the policyholder ages. Level term offers constant premiums by averaging the policyholder’s mortality charges over the full term. This inevitably means lower back end premiums at the cost of higher up front premiums. Had the policyholder opted for non-level term life, his or her premiums would be lower the first half of the term than they would be under a level policy, but higher in the second.
Level term insurance is best suited to younger heads of households who are not looking for investment or savings aspects in their life insurance policy. These individuals can receive low rates due to their age, and typically make use of temporary coverage to protect vulnerable periods in their lifetimes, such as raising children. Level term insurance is slightly more expensive than non-level term, making it appropriate for individuals preferring the peace-of-mind of averaged-out payments over lower but ever-increasing premiums.
Non-level or renewable term life is the most common alternative to level term insurance. In these policies premiums increase every year, making them cheaper up front. For struggling families that need the lowest up front cost possible, non-level term life insurance is ideal. Renewable term life is another variant that allows the insured to prolong his or her policy after it matures without having to pass additional medical exams. This eliminates the possibility of not qualifying for a new policy after the original one expires a common disadvantage of non-renewable term life. The less sure you are about the length of time for which you need coverage, or the more worried about worsening health conditions, the more important renewable term becomes.
Other alternatives include permanent life policies, which eliminate the risk of lapsing coverage and the need to re-pass medical exams altogether, albeit at additional cost.
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