You want to ensure that the people who depend on your income are financially secure, even if something were to happen to you. Life insurance is a key way to protect your loved ones.
What is level term life insurance?
Level term life insurance is what’s known as a level premium term life insurance policy. Basically, that means you’ll get coverage that lasts for a set period of time and the amount you pay won’t change. Once the period of time (the term) ends, your coverage will end.
A level term life insurance policy can give you peace of mind that the people who depend on you will have a death benefit during the years that you are planning to support them. It’s a way to help take care of them in the future, today.
How level term life insurance works
A level term life insurance (sometimes called level premium term life insurance) policy provides coverage for a set number of years (e.g., 10 or 20 years) while keeping the premium payments the same for the duration of the policy. Here’s how level term insurance works.
The cost of your insurance won’t increase
With level term insurance, the cost of the insurance will stay the same (or potentially decrease if dividends are paid) over the term of your policy, usually 10 or 20 years.
Your coverage will end someday
Unlike permanent life insurance, which never expires as long as you pay premiums, a level term life insurance policy will end at some point in the future, typically at the end of the period of your level term.
You can convert to permanent insurance in the future
The death benefit of permanent life insurance never expires, and a permanent policy has additional benefits you can use during your lifetime. Because of this, many people use permanent insurance as a stable financial planning tool that can serve many needs. You may be able to convert some, or all, of your term insurance during a set period, typically the first 10 years of your policy, without needing to re-qualify for coverage — even if your health has changed.
The insurance company may pay your premiums if you become disabled
If you have the optional Waiver of Premium benefit on your term policy, and you become totally disabled, the insurance company will pay the premium for you. In addition, you may be able to convert your term insurance into a permanent policy and the company will pay those premiums during your disability. The permanent policy will build cash value, which you will be able to access throughout your life 1.
You may receive dividends
At Northwestern Mutual, the cost of our insurance is based on certain assumptions, like how many death claims we expect to pay in a year. Whenever the company performs better than we assumed, we may pay a dividend to our policyholders (which we’ve done every year since 1872)2. With level term insurance, dividends can be used to reduce your premiums.
When to review your level term life insurance
The good news is that your term insurance is likely something you won’t make many changes to over the years. But there are a few times when you may want to reach out to your financial representative to review your policy:
Changes in your family situation. When you have a change in your family situation, like a divorce or the birth of a child, you may want to review your policy to make sure the beneficiaries listed are still correct.
Changes at work. Over time, there’s a chance that your income will increase, perhaps substantially. As it does, you may want to add to your insurance coverage in the future.
As your financial plan changes. When you first get insurance, you may have little savings and a large mortgage. Eventually, your savings will grow and your mortgage will shrink. As this happens, you may want to eventually reduce your death benefit or consider converting your term insurance to a permanent policy.
Pros and cons of level term life insurance
Level term life insurance has several advantages, including:
- Level premiums. The amount you pay for your insurance won’t change over time.
- Guaranteed payout during your term. So long as you pay your premiums, you can rest easy knowing that your loved ones will receive a death benefit if you die during the term.
- Ability to convert to permanent insurance. Many term policies allow you the ability to convert to permanent insurance without having to take another health exam. This can allow you to take advantage of the additional benefits of a permanent policy.
Cons of level term life insurance include:
- Higher initial premiums. While level term life insurance costs stay the same over the term, they’re often initially more expensive than a term life insurance policy with premiums that increase over time.
- Coverage will end. With term life insurance, your coverage will eventually end. Once that happens, you will not owe additional premiums, but your family will no longer get a death benefit if you die. However, as noted above, you may be able to convert your policy to permanent insurance, which offers a lifelong death benefit.
Level term life insurance and financial security
Your life is hectic and busy enough without the added stress of worrying about your loved ones’ future financial security. With level term life insurance in place, you know that your family is protected, which lets you get back to the things that matter most.
1Using cash values through policy loans, surrenders, or cash withdrawals will reduce benefits and may affect other aspects of your plan.
2Dividends are not guaranteed.
