What is Level Death Benefit
A level death benefit is a life insurance payout that is the same whenever the insured person dies, whether shortly after purchasing the policy or many years later. Compared to a policy that provides an increasing death benefit, one that provides a level death benefit will be less expensive (that is, the premiums will be lower for the same amount of initial benefit). However, inflation will diminish the value of the level death benefit over time.
Understanding Level Death Benefit
A level death benefit is one of two death-benefit options available under many universal life insurance policies; the other is an increasing death benefit.
A whole life policy has two components: a cash value component and a pure insurance component. When the policy holder chooses the level death benefit, the value of the pure insurance component decreases over time to keep the death benefit the same while the policy’s cash value increases. If the policy holder chooses the increasing death benefit option, the pure insurance component will remain the same over time; so as the policy’s cash value increases, the death benefit increases.
Term life insurance policies also offer a level death benefit; whether the policyholder dies five years into the term or 20 years into the term, the death benefit will be the same.
Who Should Buy Level Death Benefit Insurance?
Whether the value of a level death benefit policy is better than that of an increasing death benefit policy mostly depends on the age of the insured. Generally when under age 60, an increasing death benefit is better. When a policy purchaser is over age 60, a level death benefit works better simply because it’s more cost effective. Those in higher income brackets usually should also opt life insurance policies with an increasing death benefit.
How Level Death Benefits Work
In a $500,000 whole life insurance policy with a level death benefit, as the premium is paid, fees 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 value each month. Over time, as premiums are paid, the cash value of a policy increases, and the amount of insurance purchased each month gradually decreases. For example, in year two, a $500,000 policy has a cash value of $1,500 so only $498,500 of insurance is being purchased.
Upon the death of the insured, the insurance company pays a death benefit that is partly insurance and partly a return of policy’s cash value. For example, assume the owner paid the premium for 15 years, and the policy had an accumulated a cash value of $65,000. The insurance company would pay $435,000 for insurance and return the $65,000 of cash value for a total benefit of $500,000.