What is the level death benefit
A level death benefit is a payment from a life insurance policy that is the same every time the insured person dies, shortly after purchasing the policy or several years later. Compared to a policy that offers an increasing death benefit, one that offers a level death benefit will be less expensive (that is, the premiums will be lower for the same initial benefit amount). However, inflation will decrease the value of the death benefit over time.
Understanding the level death benefit
A whole life insurance policy has two components: a cash surrender value and a pure insurance component. When the policyholder chooses the level of the death benefit, the value of the pure insurance component decreases over time to keep the death benefit unchanged while the surrender value of the contract increases. If the policyholder chooses the ascending death benefit option instead, the pure insurance component will remain the same over time; therefore as the cash surrender value increases, the death benefit increases.
Key points to remember
- Life insurance policies – both whole life and term insurance – pay benefits to beneficiaries when the policyholder has died.
- A level death benefit is a type of benefit the amount of which does not vary, regardless of when the insurance was purchased.
- Compared to plans that offer increasing benefits, the level death benefit policy is generally cheaper.
- People over the age of 60 are more likely to apply for level death insurance because of the costs.
Term life insurance policies also offer a uniform death benefit; whether the policyholder dies five years after the term or 20 years after the term, the death benefit will be the same. The main difference between term policies and whole life policies is that there is no cash surrender value component in a term policy.
How death benefits work
In a whole life insurance policy of $ 500,000 with a level death benefit, when the premium is paid, the costs and sales charges are deducted and the remaining amount is credited to the cash value. The cost of insurance is then deducted from the cash surrender value each month. Over time, as premiums are paid, the cash surrender value of a policy increases and the amount of insurance purchased each month gradually decreases. For example, in the second year, a $ 500,000 policy has a cash value of $ 1,500, so that only $ 498,500 in insurance is purchased.
On the death of the insured, the insurance company pays a death benefit which is partly insurance and partly reimbursement of the surrender value of the contract. For example, suppose the owner paid the insurance premium for 15 years and the policy had accumulated a cash surrender value of $ 65,000. The insurance company would pay $ 435,000 for the insurance and reimburse the $ 65,000 in cash value for a total benefit of $ 500,000.
Who Should Buy Level Death Insurance?
Whether the value of a level death insurance policy is better than that of a growing death insurance policy depends mainly on the age of the insured. Generally, when you are under 60, an increasing death benefit is preferable. When a policy buyer is over 60, a level death benefit works best simply because it is more profitable. In many cases, people with higher incomes should also opt for life insurance policies with an increasing death benefit.