3.3 Term Life Insurance Types and Features

What Term Life Is

Term life insurance provides a death benefit for a specified period (the term) and builds no cash value. It is pure protection — the entire premium funds mortality and expense, with nothing set aside as savings. Because there is no reserve to draw on, term is the lowest initial premium for a given face amount, making it the product of choice for temporary, high-need situations such as covering a mortgage or income during child-rearing years.

The trade-off: term provides temporary coverage. If the insured outlives the term and the policy is not renewed or converted, coverage simply ends with no return of premium (unless a return-of-premium rider applies).

The Three Death-Benefit Patterns

Term policies are classified by how the face amount behaves over the term:

Decreasing term is the classic mortgage protection product: the face amount falls roughly in step with a declining loan balance, while the premium usually stays level. Increasing term is frequently seen as a cost-of-living (COLA) rider that raises the benefit to track inflation.

Annual Renewable Term (ART)

Annual renewable term (ART) — also called yearly renewable term — is purchased one year at a time. It is renewable without evidence of insurability, but the premium increases each year because it tracks the rising natural mortality cost as the insured ages. ART has the lowest first-year premium of any term form but becomes expensive at older ages. Level term (e.g., 10-, 20-, or 30-year) instead averages those rising costs into a fixed premium for the level period.

Renewability and Convertibility — The Key Features

Two features dominate term exam questions:

• Renewable — the owner may continue coverage for another term without proving insurability (no new medical exam). The new premium is based on the attained age, so it rises. This protects an insured who became uninsurable.
• Convertible — the owner may exchange the term policy for a permanent (whole/universal) policy without evidence of insurability. Conversion may be based on the original age (premium reflects age at issue, sometimes with a back-premium charge) or attained age (premium reflects current age).

Both features let an insured who has developed health problems keep or upgrade coverage. They are the most common 'best answer' choices when a question asks how an uninsurable person obtains permanent coverage.

Cost Comparison and Riders

For the same face amount, expect this ordering of initial premium, lowest to highest: ART (year one) < level term < whole life. Over a full lifetime, however, level term renewed annually past the level period can exceed permanent cost.

Common term-related riders:

• Term rider on a permanent base policy — adds temporary coverage (e.g., a family term rider covering a spouse/children).
• Return of Premium (ROP) rider — refunds premiums if the insured survives the term; it raises the premium and the schedule resembles increasing term.
• Waiver of premium — keeps the term policy in force if the insured becomes totally disabled.

Scenario: Choosing a Term Form

A 35-year-old has a 25-year, $300,000 mortgage and two young children. Decreasing term matches the falling mortgage balance at low cost, but it leaves nothing once the loan is repaid. A 20- or 30-year level term keeps the full $300,000 available for family income too, and a convertible feature lets the insured switch to permanent coverage later if health declines. The exam-preferred recommendation balances need, duration, and the convertibility safety net rather than choosing on price alone.

Term structures and the renewability/convertibility privileges

Term life is pure protection — no cash value, lowest initial premium, temporary coverage. The three benefit shapes are tested constantly:

Conversion: original age vs. attained age

Renewability lets the insured continue coverage at the end of a term without proving insurability, but at the higher attained-age rate. Convertibility lets the insured exchange term for a permanent policy, again without evidence of insurability — valuable if health has declined.

Conversion can be priced two ways:

• Original age: Premium is based on the age when the term policy was first issued. Lower ongoing premium, but the insurer charges a back premium (lump sum) for the difference plus interest.
• Attained age: Premium is based on the insured's current age at conversion. No back charge, but a higher continuing premium.

Exam tip: ART has the lowest first-year premium of any term form but is the most expensive over time because the premium climbs every year with mortality cost. Level term blends those yearly costs into one flat premium for the whole term.