What is Level-Premium insurance?
Equal Premium Insurance is term life insurance for which the premiums are guaranteed unchanged throughout the contract, while the amount of coverage offered increases. As a result, coverage can be beneficial over time because a policyholder continues to pay the same amount but has access to increased benefit coverage as the policy matures.
The most common terms are 10, 15, 20 and 30 years, depending on the needs of the policyholder. Level-Premium is different from term life insurance policies because they have premium rates that increase as the policies age.
Key points to remember
- Level-Premium Insurance is a type of life insurance in which the premiums remain the same price for the duration, while the amount of coverage offered increases.
- Premium payments often start at a higher level than policies with similar coverage, but are ultimately worth more than competitors, as policyholders benefit from increased coverage over time at no additional cost.
- The terms are generally 10, 15, 20 and 30 years, depending on the requirements of the policyholder.
Price comparison for Level-Premium insurance
Insurance premiums with equal premiums are initially higher than other policies offering similar coverage. But at the end of the contract, the premiums often end up with a better deal, because the higher premiums have been offset by the increase in coverage during a life cycle period where an policyholder usually has more medical problems. . Policies with similar coverage and lower premiums generally do not see an increase in coverage as they mature, which for some investors limits the benefits of paying lower premiums up front. The lure of better coverage at a later date, without an increase in premiums, is a key reason why investors sometimes choose equal premium insurance, provided they are able to financially tolerate higher payments.
Higher level insurance explained
This policy is included in term life insurance, which means it only provides coverage for a fixed term and only has a death benefit, as opposed to a savings component like in whole life insurance coverage. To determine if equal premium insurance is preferred, consider the length of coverage required.
For example, if the main purpose of the death benefit is to provide income to support very young children and fund school fees, a 20-year bonus may be appropriate. However, if these children are already in their early teens, a 10-year level bonus may be sufficient.
Some forms of life insurance are vulnerable to rate hikes. With equal premium insurance, premiums are guaranteed and will never be changed, unless the policyholder requests a change. The payment of the policy also remains the same throughout the duration, unless the lessee requests otherwise.
If the policyholder dies during the life of the contract, the person’s family could receive a cash payment to use to pay off an existing mortgage, help pay current household bills and other basic needs, or even pay the funeral or memorial services of the policyholder.
Higher and declining term life insurance
Although the two types of life insurance are similar, they nevertheless have main differences and are suitable for different applications. With equal premium insurance, the policy pays a benefit if the policyholder dies for a fixed period (the duration). If the death occurs outside this period, there is no payment. With the decline in term life insurance, the amount of coverage decreases over time, in the same way that the repayment mortgage decreases over time. Decreasing term life insurance is generally purchased to pay off a specific debt, such as a repayment mortgage. The policy ensures that upon death, the repayment mortgage or other specified debt is settled.
Other types of specialized life insurance include “life insurance for over 50s”, a form of specialized insurance for people between the ages of 50 and 80. There is also joint life insurance, in which two people in couple take out individual policies. . The police will cover the two lives, usually at the first death.
Example from the real world
The age and duration of policyholder needs is crucial in determining whether a guaranteed, equal-premium policy is optimal compared to an annual renewable policy (APR), which increases with the age of the policyholder. The average term and premium that customers often choose is 20 years and $ 600.00.
Let’s say that two friends, Jen and Beth, both 40 years old and in good health, choose to take out life insurance. Jen buys a guaranteed level policy at $ 37 per month, with a 20-year horizon, for a total of $ 440 per year. But Beth thinks that she may only need a plan for 3 to 5 years or until full payment of her current debts. So, instead, she opts for an annual renewable term (YRT) policy that starts at $ 20 per month and continues for the first five years. She initially pays $ 240 per year.
From second to fifth year, Jen continues to pay $ 444 per month and Beth continues to pay $ 240 per year. If Beth cashes her policy in the fifth year, she will have saved a lot of money compared to what Jen paid. But what if Beth doesn’t stop in the third year? What if she buys a house and wants to keep her policy a little longer. Now, she is at a disadvantage because, in sixth grade, Beth will be 45 and fall into a higher risk category.
In many cases, its annual rate will jump to almost 200%. So now, in the sixth year, she pays $ 654 a year, compared to $ 444 a year for Jen. After age 45, rates tend to increase each year, sometimes up to 10% per year. After 56 years, they tend to increase even more. At age 20, at age 60, by choosing and respecting a policy with an annual renewal rate, Beth could pay more than $ 2,600 per year, compared to $ 444 per year for Jen.
Over 20 years, Jen paid $ 440 a year each year for a total of $ 8,880 with her guaranteed level bonus plan. But Beth, who opted for an annual renewal plan, stayed at $ 240 a year for the first five years, then saw her premiums increase by 10% a year over the past 15 years, ended up paying more than $ 24,000 over the life of the policy. .