2.2 Term Life Insurance

Term life insurance provides pure death protection for a specified period (the term) and builds no cash value. If the insured dies during the term, the death benefit is paid; if the insured outlives the term, coverage simply ends with nothing returned. Because the insurer collects premium for temporary risk only, term offers the lowest initial premium of any life product, making it ideal for temporary needs such as income replacement during child-rearing years or covering a mortgage balance.

Core Characteristics

• Temporary: coverage lasts a stated number of years (10, 20, 30) or to a stated age (e.g., to age 65).
• No cash value: cannot be borrowed against or surrendered for value.
• Pure protection: premium funds mortality cost and expenses only.
• Renewability and convertibility are the two most-tested optional features.

Why Term Costs Less

Term premiums are low because the insurer is exposed to risk for only a limited period and holds little reserve. The probability that a healthy 30-year-old dies in a given year is small, so the pure mortality charge is small. As the insured ages, that probability rises, which is why term renewal premiums climb steeply and why a large permanent need is eventually cheaper to fund with permanent insurance bought while young.

Three Death-Benefit Patterns

Level term keeps the face amount constant. Decreasing term reduces the death benefit on a schedule, commonly matched to a declining mortgage balance; the premium typically stays level even as coverage drops. Increasing term grows the face amount, often used inside riders or return-of-premium designs.

Group and Credit Term

Most employer-sponsored group life is annually renewable group term. Credit life insurance is a form of decreasing term that pays off a borrower's outstanding loan balance at death; the creditor is the beneficiary, and the benefit can never exceed the loan balance. These illustrate how decreasing-term math is applied to real obligations.

Renewable and Convertible Features

Renewability

A renewable term policy lets the insured renew for another term without proving insurability (no new medical exam). This protects an insured who becomes uninsurable. The catch tested on exams: the premium increases at each renewal because it is based on the insured's attained age (current age), not the original issue age. Renewal is the insured's right, exercised regardless of health changes.

Convertibility

A convertible term policy allows conversion to a permanent policy (whole or universal life) without evidence of insurability. Two methods determine the new permanent premium:

• Attained-age conversion: premium is based on the insured's age at conversion (lower immediate cost).
• Original-age conversion: premium is based on the age when the term policy was issued, but the insured must pay the difference in cash values plus interest in a lump sum.

Annual Renewable Term (ART)

Annual renewable term (ART), also called yearly renewable term, renews every year without evidence of insurability. The face amount stays level while the premium increases annually with attained age.

Return of Premium (ROP)

Return-of-premium term refunds all premiums paid if the insured survives the term. It costs substantially more than standard level term because the insurer must hold reserves to fund the refund.

Cost-of-Living and Combination Designs

A cost-of-living rider is a form of increasing term that raises the face amount with inflation (often tied to the CPI) without new evidence of insurability. Family income and family maintenance designs combine a base whole life policy with decreasing or level term to pay survivors a monthly income for a set period. Recognizing the term "engine" inside these blends is a common exam task.

Reentry Term

Reentry term offers low "select" premium rates to insureds who periodically requalify by proving good health (evidence of insurability). An insured who passes the new underwriting keeps the lower select rates; one who cannot requalify reverts to higher "ultimate" rates for the same coverage. This contrasts with renewable term, where renewal never requires proof of insurability.

Choosing Term: Suitability

Term fits temporary, large needs on a limited budget: replacing income while children are dependent, covering a mortgage, or protecting a business loan for its repayment period. It is the most cost-efficient way to buy a large death benefit when young. Its weakness is that coverage can become unaffordable or unavailable at older ages, which is why convertibility is so valuable.

Trap: Renewability protects continuation of coverage; convertibility protects the right to obtain permanent coverage.

Both features waive evidence of insurability but answer different exam stems. Watch for a question asking which feature lets a term insured 'lock in' permanent coverage despite a new health condition. The answer is convertibility, not renewability.

Also remember that renewal premiums climb with attained age, so an insured who repeatedly renews ART eventually pays very high rates. Converting before health declines, or buying level term for the full needed period, usually beats serial renewal.