2.2 Term Life Insurance

Term life insurance provides pure death protection for a specified period (the term) and builds no cash value. It is the simplest and cheapest form of life insurance per dollar of face amount because the premium pays only for the cost of insurance and expenses—there is no savings element. If the insured dies during the term, the face amount is paid; if the insured survives the term, coverage ends with nothing returned (it is "pure protection" with no living benefit).

The Three Variables and Three Term Types

Every life policy has three moving parts: the premium, the face amount (death benefit), and the cash value. In term insurance there is no cash value, so term products are classified by how the face amount behaves over the term:

Decreasing term is the classic answer for mortgage protection: as the loan balance falls, the death benefit falls to match it. The premium typically stays level even though the face amount drops.

Annual Renewable Term and Premium Behavior

Annual renewable term (ART) is the purest form: a one-year policy the insured can renew each year without evidence of insurability, but at an increasing premium that rises with attained age. Because mortality cost climbs each year, ART premiums escalate steadily—cheap when young, expensive when old.

Level term (10-, 20-, or 30-year) charges a single level premium that averages the rising mortality cost across the term, so early premiums are higher than ART and later premiums are lower. This is why level term is the popular consumer product.

The Renewable and Convertible Provisions

Two provisions make term insurance flexible and are heavily tested:

• Renewable provision: lets the owner renew at the end of the term without proving insurability (no new medical exam). The new premium is based on the insured's attained age, so it costs more, but a person who became uninsurable can still keep coverage.
• Convertible provision: lets the owner exchange the term policy for a permanent policy (whole or universal life) without evidence of insurability. Conversion can be priced two ways:

Trap: Both renewable and convertible provisions waive evidence of insurability. That is their entire value—they protect an insured who would otherwise be declined. Do not confuse renewing (extending term) with converting (changing to permanent).

Common Term Riders and Edge Cases

• Return of Premium (ROP) term: refunds the total premiums paid if the insured survives the term. It is structured as an increasing-face design and costs substantially more than level term.
• Term rider on a permanent base policy: adds temporary coverage on the insured or a family member.

Key distinguishing exam fact: term has no cash value, no loan value, and no nonforfeiture options. Any question describing a policy with cash value, policy loans, or surrender value is not describing term insurance.

Re-entry Term and Worked Premium Comparison

Some level-term contracts include a re-entry provision. At the end of the term the insured may re-qualify by submitting new evidence of insurability to obtain a lower "select" premium; an insured who declines or fails the exam renews at higher "attained-age" rates without proof. Re-entry rewards continued good health but shifts risk back to the insured.

A simple cost comparison shows why young buyers favor level term while ART suits very short needs:

Trap: Term insurance is temporary. If a client needs lifetime protection—final expenses, estate liquidity, a special-needs dependent—term is the wrong tool because coverage expires and renewal costs eventually become prohibitive. Match the duration of the need to the duration of the product.

Term Conversions and the Math of Renewability

The signature term features tested are renewability and convertibility. A renewable term policy lets the insured renew at the end of each term without evidence of insurability, but the premium jumps to the attained-age rate — because the renewal pool is adversely selected, healthy insureds tend to lapse. A convertible policy lets the owner exchange term for a permanent plan with no medical exam.

Conversions can use one of two dating methods, a frequent exam distractor:

Worked example: $250,000 of annual renewable term issued at age 30 might cost about $180/year; renewed at attained age 50 the same face could cost roughly $900/year — illustrating why convertibility is exercised before health declines. Decreasing term (mortgage protection) keeps a level premium while the face drops on a schedule; increasing term raises the face (often via a cost-of-living rider). Remember: term builds no cash value, so there are no nonforfeiture options, loans, or dividends to test.