Level-Premium Insurance: Definition, Advantages, Example

 Level-premium insurance is a type of permanent or term life insurance where the premium remains the same over the policy's life. With this type of coverage, premiums are thus guaranteed to remain the same throughout the contract. For a permanent insurance policy like whole life, the amount of coverage provided increases over time.

As a result, the coverage can be advantageous over a long period of time: a policyholder keeps paying the same amount but has access to increased death benefit coverage as the policy matures.

Term policies are also often level-premium, but the overage amount will remain the same and not grow. The most common terms are 10, 15, 20, and 30 years, based on the needs of the policyholder.

KEY TAKEAWAYS

Level-premium insurance is a type of life insurance in which premiums stay the same price throughout the term, while the amount of coverage offered increases.

Level-premium policies may be permanent or term life.

Permanent insurance like whole life with level-premiums will typically see the death benefit increase over time even as the premiums remain the same.

This is because permanent life insurance accrues a cash value that adds to the death benefit amount.

Term life policies will not see increasing coverage and are usually set at 10, 15, 20, and 30 years.

How Level-Premium Insurance Works?

Level-premium insurance premiums are fixed for the life of the policy. For a term policy, this means for the length of the term (e.g. 20 or 30 years); and for a permanent policy, until the insured passes away.

Cost of Premiums

Level-premium policies will typically cost more up-front than annually-renewing life insurance policies with terms of only one year at a time. But over the long run, level-premium payments are often more cost-effective. This is because the higher premiums have typically been offset by an increase in coverage during a period when a policyholder typically has more medical issues.

Ages and Stages

The amount of level premium paid on a policy will depend on one's age and health: the younger and healthier one is, the lower the level premium will be. For term life policies, the length of the term will also matter: longer-dated policies will cost more per month than shorter policies. The length of a term policy will often be selected to best suit one's specific needs. For example, if the primary purpose of the death benefit is to provide income to support very young children and fund college expenses, a 20-year level-premium might be appropriate. However, if these children are already in their early teens, a 10-year level premium may be sufficient. If the insured is the same age, the 10-year term policy would cost less, all else equal, than the 20-year policy's premiums.

Some forms of life insurance are vulnerable to premium increases or are sensitive to interest rate changes, such as universal life or variable life policies. With level-premium insurance, premiums and the death benefit are guaranteed as long as the policy is in-force. or unless the policyholder requests a change.

Other specialty types of life insurance include "over 50s life insurance," which is a specialized kind of insurance geared toward people between the ages of 50 and 80. There is also joint life insurance, in which two people in a relationship take out individual policies. The policy will cover both lives, usually on a first-death basis.

Level Premium Term Life Insurance

Death benefit for a fixed period

Less expensive than whole life

Can be used for specific stages and ages of life

No death benefit if policyholder dies outside of fixed period

May not be long enough to cover the policy holder for their lifetime