Level Term Life Insurance: What Is It and How Does It Work?

When the term expires, so does your life insurance protection. The policyholder can either renew it for another term, possibly convert it to permanent coverage or allow the term life insurance policy to lapse at the end of the term.

Life insurance rates depend on several factors, such as health, lifestyle, age and others. Some policies may offer a no-medical exam option, meaning you do not need a detailed health screening to get coverage. The trade-off is that premiums are higher and your death benefits are usually limited during the first two years the policy is in force.

Unlike whole life policies that remain in effect for the entirety of a person’s life and build cash value, term life policies do not accumulate a cash value benefit. The policies also do not accrue cash that a policyholder can borrow against later. The only policy value is the guaranteed death benefit if a policyholder dies during the time the term insurance is in effect and premium payments are current. The death benefit is income tax free unless paid with pre-tax money and can be issued in a lump-sum payment or as annuities.

Most policyholders also have the option to convert to a permanent life insurance policy, such as a whole or universal life insurance policy, after the term is up. Others may choose to renew their policy after the initial term, which is often offered without undergoing additional underwriting or medical exam processes.

Depending on the insurer, term life insurance may be offered in smaller amounts up to policies offering a multi-million dollar death benefit. You should shop with different providers to choose the best policy benefits based on your unique circumstances.

If a policyholder purchased a 20-year policy and died during the policy term, the insurer will pay the beneficiaries the policy’s face value death benefit. This cash payout can be used for any purpose, although many people use it to pay for the deceased person’s health care and funeral costs, consumer debt, mortgage debt and other expenses.

Types of Term Life Insurance

There are several kinds of term life insurance policies. Each is characterized by a defined period of time, but some differences are worth noting.

Level Term Policy

Level term insurance has a fixed monthly payment for the policy’s life. Most policies are issued for 10 to 30 years, although some insurer’s offer longer lengths such as 35 or 40 years. The death benefit is also fixed, but policies may be further customized by adding various riders.

Decreasing Term Policy

Death benefits for decreasing term policies decline each year according to a predetermined schedule. The policyholder pays a level premium for the duration of the policy, and the risk evens out over time to justify changes as time passes. These policies are often used for changing financial protection needs, such as tying the amount to a mortgage with the policyholder matching the payout of the insurance to the declining principal of the home loan.

Annual Renewable Term Policy

Annual renewable term policies are one-year policies that can be renewed annually without providing evidence of insurability. For a renewable term life insurance policy, the premiums change yearly as the insured person ages and their risk profile changes. Short-term policies may be good for an unexpected life change, but can get expensive if renewed for several years.

There are several benefits of level term life insurance:

• These tend to be the most affordable of all policy types.
• They are simple to understand.
• Coverage makes sense for young people just starting out when they have less money to put toward the financial protection that life insurance offers.
• Policies often reflect important periods when a policyholder may have the most obligations to protect, such as a mortgage or college expenses for children.
• While there is often a maximum age when policies can be issued, some insurers offer level term life policies for people as old as 80 or more. The downside is that premiums at this age may be expensive for any insurance.

You will need to decide how long you want coverage for and in what amount before you can get answers to how much a term policy will cost. The longer the term and the higher the policy amount, the more you’ll pay in monthly premiums.

Determining the Amount of Coverage You Need

How can you make term life insurance work for you? Agents and insurers use several methods to help you reach these decisions.

Salary Calculations

The most common is buying a policy equal to 10 times your salary. However, this may not take all of your financial needs into account. If you have children, you may want to buy enough coverage to have a policy worth 10 times your salary plus college expenses, meaning you may want to add $100,000 or more for each child.

DIME Method

Another method is the DIME formula. DIME stands for debt, income, mortgage and education. Using this method, total your debts, mortgage and college expenses, plus your salary for the years your family needs protection, to come up with an appropriate death benefit amount.

Human Life Value

The Human Life Value method calculates your lifetime income potential based on what you’re earning now and what you expect to earn in the future. You may need help from a licensed agent to calculate this method because of the additional inputs required.

Cost Factors

Life insurance is competitively priced throughout the industry. While each insurer has its own methodology to determine policy costs, several factors are standard across the board. The premium you pay will normally depend on the following:

• Age
• Health and medical history
• Gender
• Lifestyle
• Policy type
• Coverage amount
• Credit standing

Term life insurance is usually the least costly life insurance available because it offers a death benefit for a restricted time and doesn’t have a cash value component like permanent insurance. Most term policies expire without paying a death benefit, which lowers the overall risk to an insurer and results in lower premium costs that are passed along to consumers.

Here is a look at sample term life insurance rates and coverage amounts for both males and females. Sample rates are based on a 20-year term duration and preferred health rating with no tobacco use.

Average Life Insurance Rates for Males

Average Life Insurance Rates for Females

Sample quotes were provided by Quote-bot, a nationally licensed life insurance brokerage. Rates are accurate as of July 2023.

Rates for life insurance begin to increase more rapidly in your 40s, making a strong argument to lock in lower rates while you’re young and likely more healthy.

Term life insurance isn’t the best choice for everyone, but it can make sense in many cases. Some people prefer a limited time frame for coverage or appreciate that term coverage is often much cheaper than permanent life insurance coverage.

Term Life Insurance vs. Permanent or Whole Life Insurance

The primary differences between a term life insurance policy and a permanent insurance policy (e.g., whole life or universal life insurance) are the duration of the policy, the accumulation of cash value and the cost.

Term life insurance products are best for people who want substantial coverage for a fixed period of time at a low cost for the life of the policy. Whole life policyholders pay more in premiums in exchange for the peace of mind in knowing they have coverage for life. Also, unless a policy is guaranteed renewable, a company could refuse to extend the term of coverage, which could be the case if a policyholder develops a severe illness. Permanent life provides coverage no matter a person’s health condition.

Term life policyholders pay premiums but do not accumulate cash value. Permanent life policies accumulate cash based on the type you purchase. Some permanent life insurance policies also have an investment option that can grow a policy’s cash value more quickly. This can be used to pay premiums or for a higher dollar amount that can be accessed later on. However, despite an investment growth feature, the growth rate of a policy with cash value is typically less compared to other financial instruments, such as mutual funds and exchange-traded funds.

Convertible term life insurance may give a policyholder the best of both types of policies. This type of policy is a term life policy that includes a rider that guarantees the right to convert an in-force term policy to a permanent policy without going through underwriting or proving insurability. The basis for the premium of the new permanent policy is your age at conversion.

Level term life insurance is desirable for people in many cases, but it depends on your personal circumstances, risk tolerance, financial standing and future financial goals.

While it can provide the most coverage for the least cost, you’ll trade off that benefit knowing that you may outlive the policy term, or if you renew the term policy that you will pay a much higher cost at an older age.

Some people want more secure life-long insurance protection, and for them, a form of whole life insurance may be a better choice. Whole life policies also offer the added benefit of growing cash value which can be used to guard against unforeseen financial emergencies.

Level term life insurance is easy to purchase in most cases after you decide how much coverage you want and for how long.

In some cases, you can go online to get life insurance quotes and buy a policy from an insurer in a matter of minutes, often called instant insurance. In other cases, you’ll need to work with an agent or an insurer’s customer service representative to buy a policy. You may also need to go through an underwriting process that will require a medical questionnaire and exam to assess your risk to the company, although some policies waive this requirement.

You may be able to buy group level term life insurance through your employer or an affinity group such as a union, often at reduced premiums. However, policy amounts may be lower than you want, and you could still need an additional policy of your own to augment your coverage.

Things To Consider When Shopping for a Level Term Policy

When you shop for a policy, check out the insurer’s financial strength rating from agencies like AM Best or Moody’s. The higher the rating, the more financially stable a provider is and will be better positioned to make good on policy payouts well in the future.

Be sure to check out the type and amount of customer complaints. You can do this by looking at the company’s J.D. Power rating to get a sense of overall customer satisfaction or by reviewing the company’s NAIC Complaint Index, which tracks the number of complaints a company receives.

You should also consider the types of riders a company offers so you can customize your policy with an accelerated death benefit, waiver of premium, child coverage or other similar options.

While you can research insurance plans on your own, you may also want to get input from a life insurance professional who can ensure you are getting the right amount of coverage for your budget.

Level term life insurance is a good option for people who want financial protection at a reasonable price. You have options you can employ at a later date, but a level term policy is a good baseline and may meet all of your needs for 10, 20, 30 years or longer. We recommend getting quotes from more than one life insurance company so you can feel confident in the policy you select.