What is a Level Death Benefit?
A level death benefit is a payout from a life insurance policy that remains constant regardless of when the insured person passes away. It provides a fixed sum, whether the insured dies shortly after buying the policy or many years later. Some policies also offer increasing death benefits, which rise in value over time.
Generally, policies with level death benefits have lower premiums compared to those with increasing death benefits. However, the fixed nature of these benefits means they can lose real value due to inflation over time.
Key Takeaways:
- A level death benefit ensures a consistent payout throughout the policy term.
- Policies with level death benefits typically have lower premiums.
- Inflation can devalue the future payout of a level death benefit.
How Level Death Benefits Work
When you purchase a life insurance policy, you choose a death benefit amount, which is the sum your beneficiaries will receive. A policy with a level death benefit provides the same payout regardless of when the insured person dies, as long as the policy is in force. For example, if you choose a $500,000 death benefit, your beneficiaries will receive $500,000 whether you die soon or decades later.
These benefits are available in both term and permanent (whole life) insurance policies. However, some policies offer changing death benefits, like increasing or decreasing death benefits, which adjust the payout over time. An increasing benefit grows during the policy term (with higher premiums), while a decreasing benefit shrinks, often aligning with decreasing needs like paying off a mortgage.
The Impact of Inflation on Level Death Benefits
Insurance companies see level death benefits as relatively low risk because they know the maximum payout if the insured dies. This lower risk translates to generally lower premiums compared to policies with increasing death benefits. However, inflation reduces the real value of a fixed benefit over time—$500,000 today won’t have the same purchasing power in the future.
To combat this, some insurers offer inflation protection riders that incrementally boost the death benefit in line with inflation. These riders come at an additional cost but help safeguard the benefit’s real value.
Real World Example of a Level Death Benefit
Consider John, a 30-year-old in perfect health, with a $70,000 annual income. After expenses, John saves $700 each month and decides to buy life insurance for his family’s future.
John chooses a level death benefit policy of $500,000, resulting in a monthly premium of $300. This leaves him $400 to invest, planning to pass these investments along to his family. Because of compound interest, even modest returns can grow significantly over the long term.
John projects a 6% annual return on his $400 monthly investments over 50 years, potentially resulting in over $1.5 million. Factoring a 3% annual inflation rate, the real value of the $500,000 death benefit after 50 years would be about $114,000 in today’s dollars. Hence, John decides to supplement his policy by saving additional money for his heirs.
Frequently Asked Questions
What types of insurance offer level death benefits?
Level death benefits are standard in term and whole life policies. Universal and variable life policies offer options to select either level or increasing death benefits and the flexibility to switch between them as needed.
Do level death benefit policies charge lower premiums?
Yes, typically. Insurers charge less for these policies because the fixed benefit allows them to predict their financial liabilities more accurately.
How can you protect your level death benefit policy against inflation?
To protect against inflation, consider adding inflation protection riders or planning periodic face-amount increases. These options can offset the diminishing purchasing power of a fixed benefit over time.
The Bottom Line
Choosing a level death benefit depends on your individual needs and financial situation. While they provide stable, predictable payouts and premiums, the real value may decrease over time due to inflation. It’s crucial to discuss with your insurance agent and align your policy with your long-term financial goals.
Related Terms: life insurance, term life insurance, whole life insurance, increasing death benefit, inflation protection.
References
- National Association of Insurance Commissioners. “Life Insurance.”
- North Carolina Department of Insurance. “Life Insurance Options.”
- Progressive. “What Is Decreasing Term Insurance?”
- Gerber Life. “What Inflation Means for Life Insurance.”
- Fidelity Life. “What Is an Inflation Rider?”
- New York Life. “Universal Life Insurance.”
- United Benefits. “How Does Inflation Impact Life Insurance?”
