What is Level Death Benefit
A level death benefit is a payout from a life insurance policy 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 whole life policy has two components: a cash value component and a pure insurance component. When the policyholder 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 policyholder chooses the increasing death benefit option instead, the pure insurance component will remain the same over time; so as the policy’s cash value increases, the death benefit increases.
- Life insurance policies—both whole life and term insurance—give payouts to beneficiaries when the policyholder is deceased.
- A level death benefit is a type of benefit where the amount of the payout does not vary, regardless of when the insurance was purchased.
- Compared to plans that offer increasing benefits, the level death benefit policy is typically less expensive.
- People over the age of 60 are more likely to be candidates for level death benefit policies due to the costs.
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. The primary difference between term and whole life policies is that there is no cash value component in a term policy.
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 insurance premium for 15 years, and the policy had 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.
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. In many cases, those in higher income brackets should also opt for life insurance policies with an increasing death benefit.