Level-premium insurance refers to a type of life insurance, whether permanent or term, where the premium stays consistent throughout the life of the policy. This means that the premiums are locked in and will not change during the duration of the contract. In the case of permanent insurance, such as whole life, the coverage amount actually increases as time goes on.
This feature can be quite beneficial over the long haul: the policyholder continues to pay the same premium while enjoying a growing death benefit as the policy ages.
Term policies can also be level-premium, but in this case, the coverage amount remains fixed and does not increase. The most typical terms for these policies are 10, 15, 20, and 30 years, tailored to fit the policyholder’s specific needs.
How It Works?
Level-premium insurance premiums remain constant throughout the duration of the policy. In the case of a term policy, this applies for the entire term (such as 20 or 30 years), while for a permanent policy, it lasts until the insured individual passes away.
Example
The age and time period of the policyholder play significant roles in deciding whether a guaranteed, level-premium policy is the best choice compared to an annual renewable term (ART) policy, which tends to rise in cost as the policyholder gets older.
Two friends, Jen and Beth, both 30 and healthy, decide to purchase life insurance together. They are looking for a 30-year term policy that offers $1 million in coverage.
Jen purchases a guaranteed level-premium policy for approximately $42 each month, spanning a 30-year period, which amounts to $500 annually. On the other hand, Beth believes she will only require coverage for three to five years or until her current debts are fully settled. Therefore, she chooses a yearly renewable term (YRT) policy that begins at $20 per month and rises by 20% each subsequent year. In the first year, her total cost is $240, and by the fifth year, it will be around $500.
In years two to five, Jen keeps paying $500 each month, while Beth has only spent an average of $357 annually for the same $1 million coverage. If Beth decides she no longer requires life insurance after five years, she will have saved a significant amount compared to Jen’s payments. However, if Beth believes she needs life insurance for another 25 years, she may find herself at a disadvantage. As Beth ages, her annual premiums will increase, while Jen will maintain her $500 monthly payment.