Level Death Benefit: What it Means, How it Works, Example

What Is a Level Death Benefit?

A level death benefit is a payout from a life insurance policy that remains the same regardless of whether the insured person dies shortly after purchasing the policy or many years later. There are also policies that offer the option of an increasing death benefit, which rises in value over time.

Generally speaking, life insurance policies with level death benefits will charge lower premiums than those with increasing death benefits. However, this does not necessarily mean that level death benefits offer superior value since inflation can reduce the level death benefit’s real value over time.

How Level Death Benefits Work

When you buy a life insurance policy, you pick a death benefit for your coverage. This is the amount your heirs receive if you pass away while insured. A level death benefit policy provides the same payout the entire time you're insured. If you sign up for $500,000 in coverage, that's what the policy will pay out tomorrow, a year from now, or a decade in the future, assuming you keep your life insurance coverage. Level death benefits are available with both term life insurance and permanent life insurance policies.

In comparison, there are also life insurance policies that change the death benefit over time. An increasing death benefit policy grows the payout over time. These policies cost more than one with a level death benefit.

A decreasing term policy reduces your death benefit over time. In exchange, a decreasing term policy costs less than one with a level death benefit. You might use a decreasing term policy for a need that goes down over time, like your mortgage. As you pay off your home, you need less life insurance to cover the remaining debt.

Level Death Benefits Versus Inflation

From the perspective of the insurance company, level death benefits are relatively low risk because they allow the insurer to know with certainty what their maximum potential liability will be when the insured dies. This lower risk means policies with level death benefits are still generally less expensive than those with increasing death benefits that are more difficult to predict.

Moreover, because of inflation, the real value of the level death benefit actually declines each year. A dollar today is worth more than a dollar in the future because prices go up over time. The level death benefit might be appropriate for your family today, but could be too small a payout many years in the future.

If you are worried about inflation reducing the value of your death benefit, you could buy an extra inflation rider benefit. This feature increases your death benefit over time to match rising prices. How this works depends on the insurance company. In exchange for inflation protection, you must pay a higher premium.

Real World Example of a Level Death Benefit

The decision of whether to opt for a level death benefit or an increasing death benefit will depend on several factors, including your personal budget and your expectations of alternative investment returns.

To illustrate, consider the case of John, a hypothetical insurance shopper. At 30 years of age, John is in perfect health and has an annual income of $70,000. After paying for his expenses, John is able to save $700 per month. He is eager to purchase life insurance to help provide for his young family in case he passes away.

If John opts for a level death benefit of $500,000 on a whole life policy in Florida, then his insurance premium will be around $300 per month, according to a quote from Quotacy. This leaves him $400 to invest separately. John plans to leave the proceeds from his investments to his family. Thus, when he dies, his family will receive both the $500,000 death benefit and the value of his investments at that time.

John calculates that if he lives for 50 more years and inflation averages 3% per year during that time frame, the real value of the $500,000 benefit at that time, after adjusting for inflation, would only be about $114,000 in today's dollars. This is why it's important to save extra for your heirs if you use a level death benefit policy. Your initial death benefit provides much less spending power in the future when you account for inflation.

Given his long investment horizon, John estimates he can obtain an average annual return of 6% on his monthly investments of $400. These would be worth more than $1.5 million in 50 years’ time. With these observations in mind, John decides to proceed with the level death benefit, with the intention of investing an additional $400 per month on his family’s behalf for the remainder of his life.

The Bottom Line

Whether a level death benefit life insurance policy offers the best protection for you and your family depends on your individual circumstances and needs. Level death benefits offer predictable payouts and premiums, but will lose some of their value to inflation. To make the best decision, contact your insurance agent to discuss your long-term financial plan.