2.2 Term Life Insurance

Term life insurance provides a death benefit for a limited, specified period — the term. If the insured dies during the term, the face amount is paid; if the insured survives the term, coverage simply expires with no value returned (other than under a return-of-premium variant). Term is pure protection: it builds no cash value and accumulates no living benefits.

Because term has no savings element, it delivers the largest death benefit per premium dollar of any life product. It is ideal for temporary, high-need periods — covering a mortgage, replacing income while children are minors, or protecting a business loan.

Three Defining Features

• Temporary — coverage for a set number of years (1, 5, 10, 20, 30) or to a stated age (e.g., to age 65).
• Pure death protection — no cash value, no policy loans, no nonforfeiture or dividend options.
• Lowest initial premium — inexpensive when the insured is young, but cost rises sharply at older ages because premiums track mortality.

Because it has no cash value, term insurance also has no maturity value — nothing is paid if the insured outlives the term (the one exception being a return-of-premium rider). This is the key trade-off: term maximizes the death benefit per dollar precisely because none of the premium is diverted into savings.

Types of Term Insurance

The three classic forms differ in how the face amount behaves over the term. Premiums are normally level in all three.

• Level term keeps a constant face amount — the most common form.
• Decreasing term reduces the death benefit on a set schedule, mirroring a declining mortgage balance; premium stays level. The face hits zero at the end.
• Increasing term grows the benefit, often funding cost-of-living riders or return-of-premium features.

Annually renewable term (ART) is a level-face policy whose premium increases each year as the insured ages — the purest reflection of rising mortality cost. Level-premium term (e.g., 20-year level term) instead averages the premium so it stays flat across the whole term, then jumps at renewal.

Reading the Question Carefully

Many exam items hinge on which element changes. Hold the face amount steady and vary the premium and you describe ART; hold the premium level and shrink the face and you describe decreasing term. The combination of level premium with a declining benefit is the signature of mortgage-protection (decreasing) term, while level premium with a level benefit is ordinary level term.

Renewable and Convertible Provisions

Two provisions make term flexible and are heavily tested. Both share one purpose: they let the insured continue or upgrade coverage without evidence of insurability.

Renewable lets the policyowner renew for another term with no new medical exam. The new premium is based on the insured's attained age at renewal, so it rises each renewal. Renewability protects an insured who has become uninsurable but still needs coverage.

Convertible lets the owner exchange the term policy for a permanent (cash-value) policy, again with no proof of insurability. Conversion can be priced two ways:

• Attained age — premium set at the age when converting (lower cost at the moment of conversion; the common default).
• Original age — premium as if the permanent policy had begun at the original issue date. This requires paying the back-premium difference plus interest in a lump sum, but yields a lower ongoing premium.

Trap: Both provisions waive proof of insurability — that is their entire value. A policy can be renewable, convertible, or both.

Return of Premium (ROP) Term

ROP term refunds total premiums paid if the insured survives the level term. It costs substantially more than plain level term because the insurer must fund that refund; the returned premiums are not taxable because they are a return of the owner's own basis.

Comparing Term with Permanent Coverage

The central exam contrast is temporary protection versus lifetime protection with savings:

When Term Is the Right Answer

Term is the appropriate recommendation when the need is temporary and the budget is limited — covering a 30-year mortgage, replacing income until children finish college, or protecting a business loan that amortizes over a fixed period. The phrase "maximum protection, minimum premium, limited time" almost always points to term on the exam.

A Common Distractor

Exam questions exploit the fact that term premiums are usually level within a single term but jump at each renewal under a renewable provision. Annually renewable term (ART) is the exception that increases every year. Do not confuse a level premium during the term with a level premium for life — only permanent insurance offers the latter.