What is the purpose of level premium funding?

The purpose of level premium funding is to balance early excess payments against future costs. In a level premium insurance policy, the insured pays the same premium amount throughout the life of the policy, regardless of the age or health status of the individual. This means that during the early years of the policy, the premiums paid may exceed the actual costs of coverage. These excess payments create a reserve that can be used to cover higher costs of insurance as the insured ages, effectively spreading out the cost of insurance over the life of the policy.

This mechanism allows for affordability and predictability in budgeting for insurance costs, as policyholders do not have to worry about fluctuating premium amounts as they get older or if their health changes. The level premium structure is particularly beneficial in providing financial stability for both the insurer and the insured.