2.2 Term Life Insurance

Term life insurance provides pure death protection for a specified period (the term) and builds no cash value. If the insured dies during the term, the face amount is paid; if the insured survives the term, coverage ends with no payout. Because there is no savings element and claims are paid only if death occurs within the term, term insurance carries the lowest initial premium of any life product. It is described as offering temporary protection and pure protection.

The Three Term Variations

Term policies differ in how the face amount and the premium behave over the term. Memorize this table — it is one of the most frequently tested items on the national exam.

Level Term

With level term, both the death benefit and the premium remain constant for the entire term (commonly 10, 20, or 30 years). This is the most common form sold today.

Decreasing Term

With decreasing term, the death benefit declines on a schedule while the premium stays level. It is classically matched to a mortgage or amortizing loan: as the loan balance falls, so does the needed coverage. Credit life insurance is a form of decreasing term that pays off a debt if the borrower dies, with the lender/creditor as beneficiary up to the outstanding balance.

Increasing Term

With increasing term, the death benefit grows over time, usually to fund a feature such as a return-of-premium benefit or a cost-of-living (COLA) rider. Premiums rise as the benefit grows.

Annual Renewable Term (ART) and Reentry

Annual Renewable Term (ART), sometimes called yearly renewable term, lets the policyowner renew each year without evidence of insurability, but the premium increases each year as the insured ages. ART is the purest measure of the rising cost of mortality.

Re-entry term offers lower renewal rates if the insured periodically re-qualifies by submitting new evidence of insurability; failing to requalify means renewing at the higher standard schedule.

The Renewable and Convertible Provisions

Two provisions appear on most quality term policies and are heavily tested:

• Renewable — the policyowner may renew for another term without proving insurability. The new premium reflects the insured's attained age, so it is higher. This protects an insured who has become uninsurable.
• Convertible — the policyowner may exchange the term policy for a permanent policy without evidence of insurability. Conversion may be priced at:
  • Attained age — premium based on the insured's current age (lower immediate premium, common).
  • Original (issue) age — premium based on age at original issue; the insurer typically charges a lump sum for the back premiums and reserve difference.

Trap: Both renewable and convertible options let the insured continue coverage without new underwriting. The renewable option keeps the policy as term; the convertible option moves it to permanent. Exam answers often hinge on which one preserves insurability into a permanent policy — that is conversion.

Return of Premium (ROP) Term

Return-of-premium term refunds the total premiums paid if the insured survives the level term. It costs substantially more than ordinary level term because the insurer must fund the refund (functionally via an increasing benefit). The refund is generally income-tax-free because it is a return of the policyowner's own money, not a gain.

Worked Renewal-Cost Example

An insured buys 10-year level term at age 35 for $300/year. At 45 the policy renews without underwriting, but the premium is recalculated at attained age 45 and jumps to roughly $700/year; at 55 it climbs again. This rising renewal cost is why renewable term is meant as a bridge, not a permanent solution — an insured who stays healthy is usually better off buying a new level-term policy at a fresh competitive rate, while an insured who has become uninsurable relies on the guaranteed renewal.

When Term Is Appropriate

Term is ideal when the need is temporary and the budget is limited — a young parent wanting maximum coverage while children are dependent, a homeowner protecting a mortgage, or a borrower securing a business loan. It is poor for permanent needs such as final-expense funding or estate-liquidity planning, which exist regardless of when death occurs. Producers should also remember term's tax profile: there is no cash value, so no living tax issues arise, and the death benefit is paid income-tax-free to a named beneficiary just as with permanent insurance.

Finally, distinguish term from a decreasing-term rider versus a freestanding policy. Many permanent policies add a family income or mortgage protection rider that is internally decreasing term; on the exam, the word "rider" signals an add-on benefit attached to a base policy, while a standalone term contract is the base policy itself. Both share the same no-cash-value, pay-only-on-death-within-term mechanics.