What is level-term life insurance?
[social_share]Level-term life insurance is intended to level the cost of life insurance premiums across the term of the policy. But this feature will have the strange effect of the life insurance costing more over the long term than it costs in the short term.
Level-term life insurance aims to combat what can be seen as the unfair effect of insurance costs rising throughout the policy’s term. If a person purchased a life insurance policy charged on an annual basis, the early policies would be charged at a low rate, but as the person aged the premiums would increase. The person’s rising age turns his or her very low chances of dying in the next year into merely low chances of dying. After all, someone who is thirty has a lower chance of dying in the coming year than someone who is fifty, even though both of them objectively have a low chance of dying in the year.
This same dynamic is at work in a twenty-year life insurance policy. The person is getting older and so their underlying risk is rising. However, there is a lot of customer resistance to the idea of rising premiums throughout the policy, and there is an increased chance of the policy holder discontinuing the policy as they become disgruntled with the higher cost. This is why level-term life insurance is commonly used.
Level-term life insurance calculates the policy holder’s life expectancy at the beginning of the policy. Premiums can be calculated at the same time and remain constant throughout the term.
For this reason, long-term life insurance policies generally cost more than short-term policies. The long-term life insurance premiums not only reflect the low chance of the policy holder dying at thirty, but the slightly higher chance of dying at forty and then fifty. Because a twenty-year insurance policy on a level term insures a thirty-year-old’s life for the same price as it will when he or she is fifty, the policy will cost more per month than an annual policy. But the premium costs generally start to even up at forty, and may be more attractive at fifty.
This also increases the value of these life insurance policies towards the end of their term, because a younger purchaser is overpaying on the level monthly premium, and underpaying at the later stages.
