Confusion arises when the term "level term life" is used to refer to a policy with a fixed premium that does not change over the course of the policy's life. This is a level premium term life insurance policy, but it is frequently referred to as simply level term life insurance.

The two options are usually combined: a fixed death benefit and fixed premium payments. The majority of "normal" term policies available today are some variation of level term life. When speaking with a life insurance agent or shopping online, you should specify which product you want.

Benefits of level term life insurance

The main advantage of level term life insurance is predictability. You know how much money you'll leave to your beneficiaries regardless of when you die, as long as you don't outlive your policy. This means you — and they — can make decisions based on a single value.

Budgeting is also simple because level benefits frequently imply level premiums. If you don't make any changes to your policy, the amount you pay for your second year of coverage will be the same as the amount you pay for your 12th year of coverage.

Level term life also enables you to capitalize on your good health. You can get 10, 20, or even more than 30 years of coverage based on your current health because you will be paying the same amount and receiving the same coverage throughout the life of the policy.

Annual renewable term life insurance is an alternative to level term insurance. These policies are renewed annually, with rates increasing as you get older. Insurers typically do not require additional health exams between renewals, but the cost is not always fixed and can rise in tandem with inflation.

Drawbacks of level term life insurance

There are two major disadvantages to level term life. The first is that it locks in rates based on your current health, and not everyone is as healthy as they could — or intend to be. For example, if you're starting a new diet, quitting smoking, or preparing for a major medical procedure, you might not be as healthy now as you will be in two years.

If you lock in a 20-year rate based on your current medical history, you may end up paying the same — but inflated — price for the entire 20-year period. In this case, you might be better off getting an annual renewable policy for a shorter term. Once you've established a healthier lifestyle, you can reapply for a level term policy.

Another reason you might not want a level benefit policy is that your financial requirements are changing. Assume you want coverage to assist your spouse in paying for your car, home, and child's education if you die. You might believe that you need $350,000 to cover all of those expenses right now.

Consider how your needs change over time. You'll pay off the car in five years and your child will be out of school in ten. You'll only owe $100,000 on your house at that point, but with a level term life policy, you'll still be paying for $350,000 in coverage.

This is where a decreasing term policy may appear useful — but it may not be the best option for you.

Level term vs. decreasing term life insurance

Decreasing term life insurance is a type of life insurance with a decreasing death benefit. That means your coverage will dwindle over time, hopefully in tandem with your need for coverage. Mortgage life insurance is an example of this type of coverage, though not all versions of decreasing term will be directly linked to the amount owed on your mortgage.

Mortgage and decreasing life insurance are frequently more expensive than traditional term life insurance. However, you can easily create your own "decreasing term" policy these days.

If you want to increase your policy, you may need to reapply. That means filling out new forms, taking a new life insurance medical exam, and going through the entire process again to ensure you're not too risky to qualify for more coverage.

It is much easier to reduce your coverage. Typically, you will need to fill out a form, and your insurer will issue you a new payment plan. That is all there is to it. With just a few minutes of paperwork, you'll have less coverage. In the previous example, you could simply reduce the amount of level term coverage you have once you have finished paying for your child's education.

Instead, you could "ladder" your term insurance policies for a more automated approach to coverage reduction. Laddering is the process of stacking term policies to get the total coverage you require.

You may have three term policies totaling $350,000 at the start of your coverage. One of those policies has a five-year term and a $10,000 face value — a policy's "face value" is simply the maximum amount it will pay out. The second has a face value of $240,000 and is valid for ten years. The final policy is for $100,000 and will last for 20 years, or until your mortgage is paid off.

Because your policies will expire, this laddering system will automatically reduce your coverage as your needs decrease. As you cancel policies, your total premium paid will decrease.