When you purchase a whole life insurance policy, you can choose between a level death benefit or an increasing death benefit. The former stays the same no matter when you die; the latter grows over time. Typically, universal permanent life insurance covers allow you to switch between the two benefit options, provided you stick to certain restrictions.
Here, we’ll look at both kinds of death benefits and help you choose which one is best for you.
A level death benefit is an amount from your life insurance policy that remains the same regardless of whether you die just after buying the policy or years later. Usually, level death benefit insurance coverages come with lower monthly premiums than those with increasing benefits.
But, that doesn’t automatically make this option the best, as inflation can cause the real value to diminish.
|What Does Real Value Mean? |
When we’re talking about insurance, “real value” is the amount adjusted to consider inflation. It uses that figure to measure against other items.
Most people buy life insurance to protect their families from financial burdens when they die — and we can imagine you’re doing the same. So, level benefits give you that security. You pay the monthly premiums; your beneficiaries receive a set amount of money (i.e., a death benefit) when you pass away.
It’s conducive if your household would struggle to replace your income once you’re gone.
There are tons of factors to consider when picking a life insurance policy. For instance, if you wish to pay low premiums, a level death benefit is worth considering. You’ll therefore know the death benefit given to your family ahead of time.
Canadian insurers perceive level death benefits as relatively low risk because they’re aware of how much they’ll need to pay out should you die.
Plus, as we mentioned earlier, inflation affects the real value of the benefit — technically, it declines every year. So, the insurance company’s liability effectively decreases over the years.
For the above reasons, whole life insurance policies with level death benefits tend to cost less than their increasing cousins.
To properly cement the workings of a level death benefit, consider a hypothetical insurance seeker named Ben.
Ben is healthy, makes $70,000 a year and is 30 years old. After he has paid all his outgoings, he can comfortably save $500 a month. He wants to get life insurance to protect his family’s financial state if he dies.
If Ben decides to go with a level death benefit of $500,000, his premium equals $100 per month. That leaves him with $400 to invest elsewhere. Ben wants to leave his investment proceeds to his family, so they’ll get the value of the investments and the $500,000 benefit when he passes away.
He figures out that should he live 50 more years and the inflation averages 3%, the real value of his death benefit would be only $114,000.
Despite that, Ben realizes his investments should earn more than 3% interest per annum. If he can acquire a 6% yearly return on his $400 a month investments, his account would value over $1.5 million in 50 years.
That amount is more than enough to make up the shortfall presented in the real value of his level death benefit. So, Ben decides to go with this insurance policy.
The other option is to get a whole life insurance policy with an increasing death benefit or it remains the same. If you purchased a universal policy with a death benefit of $500,000, your beneficiaries would receive that amount plus any value accumulated throughout your life.
The amount of premium you pay dictates the growth of your cover’s cash value. If the monthly cost is the same as a level death benefit policy, you can safely assume the cash value is lower.
However, depending on the life insurance policy you buy, you can use dividends to acquire additional insurance, thereby boosting your death benefits by small (yet still significant) increments every year.
You now know the details of both types of death benefits. But to make it even clearer, we’ve summarized the facts here:
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While deciding between increasing and levelling death benefits seems daunting, universal life insurance policies allow holders to switch between them. So, it’s okay to change your mind.
But as a general rule, we suggest choosing an increasing death benefit if:
We recommend policies with a level benefit if:
For added peace of mind, call Sim Gakhar about the death benefit type to suit you. With a series of strategies and tailored needs assessments under our belts, we can provide a customized recommendation to suit you, your business, and your family.
When it comes to life insurance there really is no time that is too soon to get covered. And, this is because the younger you are, the cheaper those premiums are going to be. Not only this, but you are probably healthy right now.
If you wait until something bad happens, you will not only without a doubt face higher premiums, but you might not even be able to get covered at all.
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