2.2 Term Life Insurance

Term life insurance is pure protection. It pays the face amount only if the insured dies during a stated term—10, 20, or 30 years, or to a stated age such as 65. If the insured outlives the term, coverage ends and nothing is paid. Term has no cash value and no living benefits; every premium dollar buys mortality protection and expenses. Because of this, term delivers the highest initial death benefit per premium dollar of any life product—ideal for temporary needs like a mortgage or child-rearing years.

Term is the right tool when the need is large but temporary and the budget is limited: covering income during the dependency years, protecting a 30-year mortgage, or backing a business loan that will amortize away. When the need is permanent—final expenses that never disappear, estate liquidity, or lifelong support of a dependent—permanent insurance is the better match because term will eventually expire or become unaffordable at older attained ages.

Three Patterns of Term

• Level term keeps a constant face amount and a premium that is level for the guaranteed period.
• Decreasing term has a face amount that steps down on a schedule, mirroring an amortizing loan; it is the classic vehicle for mortgage redemption insurance. The premium typically stays level even though the benefit falls.
• Increasing term raises the face amount over time and is commonly seen inside return-of-premium designs and certain riders.

Renewability and Convertibility

Two features turn cheap term into flexible term. Memorize the distinction—the exam loves to swap them.

Renewable Term

A renewable provision lets the policyowner renew for another term without evidence of insurability—no new medical exam, even if the insured's health has deteriorated. The catch: each renewal is priced at the insured's new attained age, so premiums rise at every renewal. This protects against insurability loss but not against price increases.

Convertible Term

A convertible provision lets the owner exchange the term policy for a permanent policy (such as whole life) without proving insurability. Conversion can use one of two bases:

Under original-age conversion, the insurer usually requires the owner to pay the difference in reserves (a lump sum), because the permanent policy is treated as though issued on the original date.

The combined value of renewable-and-convertible term is guaranteed future insurability: a healthy young buyer locks in the right to keep coverage and to upgrade to permanent insurance later, even if a serious illness would otherwise make them uninsurable. Conversion is normally allowed only during a stated conversion period (for example, the first 5–10 years or before a cutoff age such as 65).

Special Term Designs

• Annual Renewable Term (ART): renews every year at the new attained-age rate; the cheapest first-year cost but the steepest long-run increases.
• Return of Premium (ROP) term: if the insured survives the term, the insurer refunds the premiums paid. ROP costs substantially more than plain term, and the refund is generally income-tax-free because it is a return of the owner's own money, not a gain.
• Reentry term: offers a low premium if the insured periodically reproves good health; failing the reentry exam pushes the insured to a higher rate class.

Term vs. Permanent at a Glance

Common traps.

• Renewable protects insurability for another term; convertible protects insurability when moving to permanent coverage. Do not confuse them.
• Decreasing term has a falling face amount but usually a level premium—the premium does not decrease with the benefit.
• Term builds no cash value, so it cannot be borrowed against or surrendered for cash.

Worked Premium Comparison

Consider a healthy 35-year-old buying $500,000 of coverage. A 20-year level term policy might cost roughly $300/year because the premium funds only mortality and expenses. A whole life policy at the same face could cost $5,000+/year because it must also pre-fund lifetime coverage and build cash value. The lesson tested on exams: for a fixed budget, term buys the most immediate protection; for lifetime needs and forced savings, permanent insurance is appropriate despite the higher outlay.

Note also that with annual renewable term, the year-one premium is the lowest of any term design, but by later renewals the attained-age premium can exceed a level-term premium that was averaged over the whole period—a classic "cheap now, expensive later" trap.