6.1 How Term Works: Level, Increasing, and Decreasing Term

Why CISRO 2.1 starts with how term works

This independent OpenExamPrep chapter helps learners study term life insurance for the CISRO LLQP Life Insurance module. It is not a regulator manual and does not claim official approval from CISRO, CSI, or a provincial regulator.

Competency sub-component 2.1 asks you to analyze types of contracts. The official term contents begin with how term works, then level, increasing, and decreasing designs. Product 2.1 is 30% of the Life sitting together with riders; a candidate who can recite “term is cheap” but cannot say what is paid, to whom, and on which day of a 25-year mortgage is not ready for this slice.

Term life insurance is a contract that pays the current face amount (death benefit) if the life insured dies while the term is in force and premiums have been paid. The term is either a fixed number of years (10, 20, 25, 30) or a period that ends at a stated age (for example, to age 65). If the life insured is alive on the expiry date and the owner does not renew or convert under a contractual privilege, coverage ends. The beneficiary receives nothing for mere survival. That “all or nothing during the window” design is the whole point of term, and it is the first contrast with permanent life insurance (whole life, Term-100, and universal life), which is built to remain in force for the lifetime of the life insured if the required premiums or deposits continue.

No cash value versus permanent

A typical individual term policy has no cash surrender value (CSV). The owner cannot borrow from the insurer against the policy, cannot elect non-forfeiture options such as reduced paid-up or extended term, and will not receive a surrender cheque if they cancel. Premiums buy pure protection for the current period. The Financial Consumer Agency of Canada (FCAC) states the same consumer facts: term policies do not include cash value, you cannot borrow against them, and you do not get cash value back if you cancel.

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If premiums stop, the insurer may cancel the term contract after any grace period. There is no automatic premium loan to raid because there is no CSV to raid. That is a limitation you must disclose, not a trivia footnote.

Death benefits of personally owned exempt life policies are generally received tax-free by the named beneficiary — the same high-level tax result as other individual life, not a term-only perk. Because there is no CSV, the live-person policy gain problems that haunt surrenders of old permanent policies rarely arise on a pure term cancellation. Do not turn that into “term never has tax issues”: a corporately owned term policy still has ownership and capital dividend account questions that belong with business life, and replacing a term contract can still restart suicide and contestability clocks on a new issue.

Level, increasing, and decreasing — the death benefit, not the bill

CISRO names three face-amount patterns. The exam trap is to classify a contract by the premium instead of by the death benefit path.

Level term keeps the face amount constant for the term. A $500,000 20-year level term still pays $500,000 in month 1 and in month 239, if death occurs then. The premium on a Canadian 10-, 20-, or 30-year level term is typically guaranteed level for that initial period. After that period, if the policy is renewable, the new premium is an attained-age rate and often jumps sharply. Level face plus level initial premium is the mass-market individual product in Canada (Term 10, Term 20, Term 30, and some Term 15 / Term 25 / Term 40 plans). FCAC notes that premiums are generally cheaper than permanent at first purchase and may increase at renewal.

Decreasing term lowers the death benefit on a predetermined schedule — straight-line, or a curve meant to follow a loan amortization. Premiums are often level even as coverage falls, so the owner pays a stable bill for a shrinking benefit and the cost per $1,000 of remaining insurance rises. Decreasing term is the classical “mortgage protection” individual product. It is also the economic pattern inside many lender mortgage life / creditor certificates, even when the marketing name never says “decreasing term.”

Increasing term raises the death benefit on a schedule: a fixed percentage each year, a consumer-price index, or specified step-ups. It is used when the need itself is expected to grow — a young family whose income-replacement number will rise, or a level need that inflation would otherwise hollow out. The initial premium is higher than level term for the same starting face because the insurer is on the hook for a larger future benefit. Increasing term can be a standalone contract or a rider (cost-of-living or increasing-term rider) sitting on a level chassis. Do not confuse it with return-of-premium term, which refunds premiums if the insured survives; that is a survival benefit, not an increasing death benefit.

Worked illustration — not a quote. Amira, 35, non-smoker, buys $500,000 of 25-year coverage. In year 15 she dies.

• Level term: the beneficiary is paid $500,000.
• Decreasing term written to a 25-year, 5% $500,000 mortgage (rounded remaining principal): about $276,000.
• Increasing term at 3% per year from $500,000: about $779,000 (1.03^15 × $500,000).

Same “$500,000 term” label on the application. Three different cheques. That is the 2.1 skill.

Canadian mortgage life versus level term on a 25-year amortization

Do not mix this product with mortgage loan insurance (default insurance, often through CMHC, Sagen, or Canada Guaranty) that a lender requires when the down payment is under 20%. Default insurance protects the lender if the borrower defaults. Optional mortgage life insurance is a different sale, usually offered at the branch when the loan is funded or renewed. FCAC is explicit: it is optional, the lender cannot make it a condition of the mortgage (coercive tied selling is prohibited), and the borrower must give express consent.

FCAC’s comparison table is the exam skeleton:

On a 25-year $500,000 mortgage at a 5% illustration rate, remaining principal is roughly $370,000 after 10 years, $276,000 after 15 years, and $155,000 after 20 years (rounded). If Amira buys lender mortgage life and dies in year 15, the bank receives about $276,000 and the house is unencumbered. Her spouse does not receive a surplus for the uninsured line of credit, childcare, or two years of reduced hours. Premiums billed on the original $500,000 age-rated certificate have often not fallen even though the protection has.

If instead she owns a $500,000 25-year level term and names her spouse:

• The cheque is still $500,000 in year 15.
• About $276,000 can clear the mortgage; about $224,000 remains for other capital needs.
• If they switch lenders or sell and buy again, the individual policy is portable; many lender certificates end when that loan is paid out or moved.
• If they prepay principal, decreasing coverage shrinks faster while the income-replacement need may not.
• If they refinance and extend amortization, decreasing coverage that followed the old schedule can be too small for the new balance.

Individual decreasing term sits between those poles: Amira owns it and names her own beneficiary, so the falling cheque is not trapped at the bank, but the dollar amount still tracks a schedule that may stop matching the family’s real need. Many Canadian recommendations therefore use level term for a 25-year mortgage plus income needs, not a decreasing schedule that only retires the loan.

Underwriting timing is another practical split. Individual term is underwritten at issue (questions, and often blood, urine, or an attending physician statement). Many branch creditor products are medically light at enrolment and test eligibility when a claim is filed. A declined claim after death is a catastrophic surprise. Read the certificate; do not invent a universal “always post-claim” rule, but do not assume a branch checkbox was full underwriting.

FCAC also reminds borrowers that the home can be sold to repay the mortgage, so mortgage life is not mandatory for every file. Your job on the Life module is to put the need (income, debts, final expenses) beside the contract (level vs decreasing, who is the beneficiary) instead of nodding along at the lawyer’s office.

Exam traps on mechanics

• A level premium on decreasing coverage is not level protection.
• Joint first-to-die term (FCAC) pays on the first death under one contract; it is cheaper than two singles and clumsy on divorce. It does not change the level/decreasing/increasing face pattern.
• Group basic life at work is usually yearly renewable term on a master contract — a later chapter. Do not treat a $50,000 group maximum as a 25-year individual level term.
• “Term” in Term-100 means the cost pattern and the premium-paying period, not a 20-year expiry. T-100 is permanent duration.

Life module practice questionsPractice questions with detailed explanations