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 1
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 2a 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 3level death benefits versus inflationfrom 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 4if 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 5real world example of a level death benefitthe 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 the effects of compound interest over time should not be underestimated even relatively modest investment returns can lead to very large sums when allowed to compound over the long term 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 