2.2 Term Life Insurance
Key Takeaways
- Term life is temporary, pure-protection insurance with no cash value and the lowest initial premium per dollar of coverage.
- Death benefit patterns: level (constant), decreasing (declines, matches a mortgage), and increasing (rises).
- Renewable lets the insured buy another term without evidence of insurability at attained-age rates; premiums rise.
- Convertible lets the insured switch to permanent coverage without evidence of insurability, via attained-age or original-age conversion.
Term life insurance provides pure death-benefit protection for a specified period (the term) and nothing else. If the insured dies during the term, the face amount is paid. If the insured outlives the term, the coverage simply expires with no return of premium and no cash value. Term is temporary insurance and is the cheapest way to buy a large death benefit, which is why it dominates income-replacement and mortgage-protection sales.
Core Characteristics
- No cash value and no living benefits — it is protection only.
- Lowest initial premium per dollar of coverage of any life product.
- Coverage ends at the term's expiration or at a stated maximum age.
- Premiums rise sharply at older ages because mortality cost increases with age.
The Three Face-Amount Patterns
Term policies are classified by how the death benefit behaves over the term:
| Type | Death Benefit | Premium | Typical Use |
|---|---|---|---|
| Level term | Stays the same | Level | General income replacement |
| Decreasing term | Declines over time | Level (lower) | Mortgage / loan protection |
| Increasing term | Rises over time | Increasing | Return-of-premium, COLA riders |
Level term keeps a constant face amount (e.g., $250,000 for 20 years). Decreasing term starts high and steps down toward zero, matching an amortizing mortgage balance — the premium stays level even though coverage shrinks. Increasing term raises the face amount, often used in return-of-premium designs or cost-of-living riders.
Renewability and Convertibility
Two provisions make term flexible and are heavily tested.
Renewable Provision
A renewable term policy lets the insured renew for another term without evidence of insurability (no new medical exam). The new premium is based on the insured's attained age, so it rises at each renewal. This protects an insured who has become uninsurable from losing coverage.
Convertible Provision
A convertible term policy lets the insured exchange it for a permanent (whole or universal) policy without proving insurability. Two methods set the permanent premium:
- Attained-age conversion: premium based on the insured's age at conversion (cheaper now, more common).
- Original-age conversion: premium based on age when the term policy was issued; usually requires paying the back-premium difference plus interest.
Trap: Renewable lets you keep buying term; convertible lets you switch to permanent. Both waive evidence of insurability — that is the valuable feature.
Special Term Forms
Annually renewable term (ART), also called yearly renewable term, renews each year at the new attained-age rate — the purest expression of increasing mortality cost. Re-entry term offers low rates if the insured periodically re-qualifies by passing a medical exam; failing to re-qualify means paying much higher guaranteed rates.
Return of Premium (ROP) term refunds the total premiums paid if the insured survives the level term. Because the insurer must reserve for that refund, ROP premiums are substantially higher than plain level term — effectively an increasing-benefit design.
Premium Comparison Illustration
For a healthy 35-year-old buying $500,000 of coverage, the relative monthly cost typically looks like this:
| Product | Relative Monthly Premium |
|---|---|
| 10-year level term | Lowest |
| 20-year level term | Low |
| 30-year level term | Moderate |
| Whole life (same face) | Highest (5 to 15 times term) |
This illustrates the central trade-off: term buys the most death benefit per premium dollar but builds no equity, while permanent insurance costs far more but accumulates cash value and lasts for life. A common need-matching strategy is buy term and invest the difference, though it relies on the buyer actually investing the savings and outliving the term.
Group and Credit Term
Most employer-provided life coverage is group term life. It is annually renewable term issued under one master contract, with the employer as policyholder and employees as certificate holders. Underwriting is on the group, not the individual, so evidence of insurability is usually waived up to a guaranteed-issue limit. Credit life is a special decreasing term: it is written on a borrower to pay off a loan balance if the borrower dies, with the lender (creditor) as beneficiary up to the outstanding debt. State law caps the face at the loan amount so the coverage cannot exceed the debt.
Term Conversion Window Trap
Convertible term policies impose a conversion deadline — typically the insured must convert before a stated age or before the term expires. Producers must flag this window, because an insured who waits past it loses the no-evidence right and would have to re-qualify medically. When group coverage ends (employment terminates), the employee usually has a 31-day conversion right to an individual permanent policy without evidence of insurability; this conversion privilege is one of the most tested group-life provisions on the national exam.
A homeowner wants life coverage that decreases as the mortgage is paid down, while keeping the premium constant. Which term product fits best?
The convertibility provision in a term policy allows the insured to:
Special Term Forms and the Convertibility Math
Beyond level, decreasing, and increasing term, the exam tests annually renewable term (ART) — the purest one-year term whose premium rises each year with attained age — and return-of-premium (ROP) term, which refunds total premiums paid if the insured survives the level period (at a substantially higher premium).
Convertibility lets the owner exchange a term policy for a permanent policy without evidence of insurability, a critical protection for someone whose health has declined. Two conversion methods are tested:
- Attained-age conversion — the new permanent premium is based on the insured's current (attained) age, so it is lower at conversion but the insured pays based on being older.
- Original-age (retroactive) conversion — the new premium is based on the age at original issue, but the insured must pay the difference in accumulated reserves/premiums plus interest to "back-date" the policy.
Decreasing Term Worked Example
A 30-year decreasing term policy with a starting face of $300,000 backing a 30-year mortgage drops roughly in step with the loan balance. After 20 years the death benefit might be near $130,000 — matching the remaining mortgage — while the premium stays level. The trap: in decreasing term the face amount declines but the premium is level; do not confuse it with increasing term (rising face) or ART (rising premium).
Because term builds no cash value, it offers the lowest initial premium per dollar of death benefit and is the answer whenever a question asks for "maximum coverage for the lowest current cost" or "temporary need" (mortgage protection, income replacement until children are grown, covering a term loan).