3.3 Term Life Insurance Types and Features
Key Takeaways
- Term life is pure protection: a death benefit for a stated period with no cash value.
- Level term keeps both face amount and premium constant; ART renews yearly at rising attained-age rates.
- Decreasing term lowers the face amount over time and is typical for mortgage protection.
- Renewability guarantees the right to continue without proof of insurability; convertibility allows a switch to permanent coverage.
- Conversion uses either attained-age rates (no lump sum) or original-age rates (lower premium plus back premiums).
What Term Life Is
Term life insurance pays a death benefit only if the insured dies during a stated period, called the term. If the insured survives the term, the coverage simply ends and nothing is paid. It is pure protection with no savings element.
Key features that define term:
- No cash value, no surrender value, and no policy loans.
- The lowest initial premium of any life product, because the insurer funds only the death claim.
- Temporary coverage, commonly issued for 10, 15, 20, or 30 years.
Term fits temporary needs: replacing income while children are young, covering a mortgage, or protecting a business loan until it is repaid.
The Five Term Variations
| Type | Face amount | Premium | Typical use |
|---|---|---|---|
| Level term | Constant | Constant | General protection, fixed-period needs |
| Annual renewable term (ART) | Constant | Rises each year by attained age | Short or uncertain needs |
| Decreasing term | Declines over time | Constant | Mortgage and amortizing-debt protection |
| Increasing term | Rises over time | May rise | Inflation or growing-need protection |
| Return of premium (ROP) term | Constant | Constant but higher | Buyers who want premiums back if they live |
Level Term
The most common form. Both the face amount and the premium stay flat for the entire term. A 35-year-old who buys 20-year level term at $30 per month pays $30 every month for $500,000 until age 55, when coverage ends.
Annual Renewable Term (ART)
Also called yearly renewable term, ART covers one year at a time. The owner may renew each year without new evidence of insurability, but the premium rises every year because it tracks the insured's rising attained-age mortality.
Decreasing Term
The face amount steps down each year while the premium stays level. Because the benefit can be designed to track a shrinking loan balance, decreasing term is the classic vehicle for mortgage protection.
Increasing and ROP Term
Increasing term raises the death benefit over time, often to offset inflation, and frequently appears as a rider. Return of premium term refunds all premiums paid if the insured outlives the term; in exchange it charges roughly two to three times the cost of plain level term, and the refund carries no interest.
The Two Features That Drive Exam Questions
Renewability
Renewability gives the owner the guaranteed right to continue the term policy at the end of the period without proving insurability (no medical exam). It guarantees the right to renew, not the price: the renewal premium is recalculated on the insured's higher attained age. Renewal is usually allowed only up to a stated age, such as 70 or 80.
Why it matters: a 35-year-old who buys 10-year renewable term and is diagnosed with cancer at 42 can still renew at 45 at standard attained-age rates, even though no new policy could be bought.
Convertibility
Convertibility lets the owner exchange the term policy for a permanent policy (whole or universal life) without evidence of insurability, up to the same face amount, before a stated deadline. The new permanent premium can be computed two ways:
| Method | New premium basis | Up-front cost |
|---|---|---|
| Attained-age conversion | Insured's current age at conversion | None |
| Original-age conversion | Insured's age when the term policy was issued | Must pay the difference in back premiums, often with interest |
Worked example. A man buys term at age 35 and converts at 45. Under attained-age conversion he pays the permanent rate for a 45-year-old going forward, with no lump sum. Under original-age conversion he pays the lower 35-year-old permanent rate going forward but must first pay the back premiums he would have paid had he owned the permanent policy since age 35.
Comparing the Two Features
| Feature | What it does | New underwriting? | Premium basis |
|---|---|---|---|
| Renewability | Extends the same term coverage | Not required | Higher, by attained age |
| Convertibility | Switches term to permanent coverage | Not required | Permanent-policy rates |
Exam trap: both features waive proof of insurability, but renewability keeps you in term while convertibility moves you to permanent. Re-entry provisions are the opposite bargain: the insured does submit to new underwriting in hopes of qualifying for lower select rates.
A homeowner wants life coverage that costs the same each year but provides a death benefit that shrinks roughly in step with the declining balance of a 30-year mortgage. Which term product best fits this goal?
An insured converts a term policy to whole life using the original-age conversion method. Compared with the attained-age method, this insured will: