What are Level-Premium Term Life Insurance Policies?

Life insurance that guarantees a rate for the entire term of the policy has a “level premium.” With this form of life insurance, you can enjoy the low cost you originally agreed to with your insurer for the entire period you are covered. For example, a person who chooses a 30-year term knows that they’ll always pay the same amount no matter how much time has passed since they took up the policy.

The guaranteed premium is set for the same term as the policy. Usually in five- to 10-year increments, an insurance applicant can choose the level of insurance that suits their needs as well as the amount of time they want to be covered. No matter what length of time or amount of benefits they select, they enjoy no additional hikes of their premium.

How Level-Premium Insurance Works

Since a level premium sets out a fixed rate for the duration of the insurance term, average premiums usually start slightly higher than other term life insurance plans according to the Journal of Risk and Insurance. Some see this as an immediate drawback, but opting into a higher rate initially usually means an advantage overall when you consider how benefits mature at no more expense.

Higher level-premium insurance can slowly but steadily become a real bargain for those who seek the best-priced plans with the highest possible benefits. By the end of the insurance contract, premiums actually shrink in comparison to the amount of coverage that the plan eventually affords after bumps in benefits. In short, level premiums can be understood in a few simple points:

  • A guaranteed, fixed rate is a “level premium.”
  • Level premiums apply to 10-, 20-, and other terms.
  • Rates on level-premium insurance initially start higher.

When you think about it, paying the small price of a slightly larger premium at the beginning of a plan is a great way to plan ahead. The benefit of the plan is basically offset in other cases by potential rises in premiums when the insured is more likely to develop medical issues and concerns. You’re never punished for that as you age into more liabilities and risks for the insurer.

Comparison of Level Premiums to “Lower” Premiums

Some insurance shoppers see the lowest premium and believe they are getting a better deal on term life insurance right away. But, this can be deceptive and only looks at the surface-level price tag for the insurance plan’s death benefits since an increasing premium will rise each year.

For those who view their life insurance as an important financial investment, it means that they get limited advantage from having that lower premium. That’s why many savvy insurance seekers decide on a level-premium life insurance policy since they never increase their costs when they’re able to handle a higher premium in the beginning.

Since term insurance lacks the death benefit component like whole life policies, this is one of the only ways to keep the policy’s value as time passes when premium changes threaten its worth as an investment. Without savings or cash value options, it’s a good way to make sure you’re getting the deal you first hoped for.Factors Changing Term Policy Premiums with Time infographics

With a level premium, you keep your rate for the length of your policy, but with a variable payment, your life insurance can hike with time, illness, age, and your lifestyle, potentially costing you much more than a slightly higher fixed price.

In reality, level premium insurance helps families to focus on financial protection at a lower cost. In a sense, by choosing level term premiums over variable rates you get more death benefits relative to costs when compared to those with indeterminate rates. Those rates may start low, but they could grow even as their coverage stays unchanged and fixed.

Examples of Term Insurance with Level Premiums

Before you decide whether level premiums are a feature you want to choose for your life insurance, there are several factors that affect rates. The most important factors affecting life insurance premiums are your health and age at the start of the policy. The length of the term you choose is also considered when choosing the optimal monthly plan price.

Age, health, and term are important factors since your fitness and medical profile will change as the policy progresses, meaning the insurance company will take on a greater risk of paying death benefits. When you consider this, you’ll see that even by age alone, life insurance premiums will vary considerably around the standard average for level premiums on policies with $500,000 in face value according to Statista:

  • Starting from $200 per month on a 20-term.
  • Starting from $300 per month on a 30-term.

In the graph below, you can see that even two people of the same age and in good health who buy different level- and variable-premium life insurance will get different rates to begin and that their cost will change over the term.

One of them gets a guaranteed rate with a level premium for a higher price; the other gets a lower premium at the start. But, as time progresses, the policyholder with the initially lower premium may start to pay more after five or 10 years as they age into high-risk categories and develop age-related health concerns. The renewable rate on the term policy changes to match the risk age and health creates for the policyholder. Since these bumps to insurance costs are inevitable, it makes sense why so many choose level premiums for an initially higher price tag.

Their annual rate would increase as much as 200 percent after just a few years. On the same timeline, the level life insurance premium will never change even as their death benefits grow in value. By the time the variable-rate policy reaches 60 and 65 years, the premium hikes are so dramatic that it would no longer serve many policyholders to maintain such a policy on their income. (It could be one of the reasons Americans don’t purchase life insurance at all according to Statista.)

Policy Instances with Return of Premium

If you pick life insurance, you intend to safeguard your family financially with a term plan for as long as they need your income and you have large liabilities like mortgages, tuition costs, loans, and other debts. When you choose a term life insurance plan with “Return of Premium” vs. term life with a variable rate, you can also get your premiums back at the end of the term in some cases.

Outliving your insurance coverage is ideal, and receiving your premiums after completing the plan of 20 or 30 years only adds to the advantage of choosing a level premium payment. Once you lose coverage at the end of the plan, you won’t have to think you expended money that could have been used supporting your family (under considerable risk). Instead, you’ll see how smartly you selected the best financial protection for them.

Consider Level-Premium Term Insurance with Sproutt

Your primary purpose in getting life insurance according to The American Economic Review to provide a protective income to your beneficiaries—spouses, children, and dependents—in the event that you pass away and they lose your support. With that in mind, increasing the benefits available over time stays smart, and you can save in the long run with level premiums compared to the eventually lower value of comparable, non-level policies.

Sproutt can help you select the right life insurance plan for you and your loved ones. Whether it’s term or whole, level or variable—find out the best rate on life insurance while getting all the benefits and features you’re looking for. Use Sproutt to get quotes on term life insurance policies with level and return of premium options

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