3.3 Term Life Insurance Types and Features

What Term Life Is

Term life insurance pays a death benefit only if the insured dies during a specified term, such as 10, 20, or 30 years. If the insured outlives the term, coverage ends and nothing is paid. Term is pure protection: it has no cash value, no surrender value, and cannot be borrowed against.

Because it funds only the cost of insurance plus expenses, term carries the lowest initial premium of any life product. It suits temporary needs such as covering a mortgage or protecting income while children are dependent.

The trade-off is that term coverage is temporary. If the need outlasts the term, the insured must renew at a higher attained-age rate, convert to permanent insurance, or risk going uninsured. Term is therefore best understood as low-cost protection for a defined window rather than a lifelong plan, and matching the term length to the length of the need is the agent's central job.

Term vs. Permanent at a Glance

A useful analogy: term is like renting protection, while permanent insurance is like buying and building equity. Term answers the question "how do I protect my family while the need is large but temporary?" Permanent insurance answers "how do I keep coverage in force no matter how long I live and accumulate value along the way?" Because the two solve different problems, agents commonly pair them, or use the conversion feature to move from term to permanent as a client's needs change.

Types of Term Insurance

Term comes in several face-amount patterns. Know how the death benefit behaves over the term for each:

• Level term - the death benefit and premium both stay constant for the entire term. This is the most common form.
• Decreasing term - the death benefit declines on a set schedule while the premium stays level. Classic use is mortgage protection, where the face amount falls roughly with the loan balance.
• Increasing term - the death benefit rises over the term, often used inside riders such as a return-of-premium or cost-of-living rider.
• Annual renewable term (ART) - one-year coverage that the owner can renew each year without new evidence of insurability; the premium increases every year as attained-age mortality rises.

Level term dominates the individual market because buyers want a predictable premium and a stable face amount over a planning horizon such as a working career. Decreasing term remains popular as low-cost mortgage protection. ART is often used as a short-term bridge or inside a rider.

Decreasing-term scenario

A borrower buys $250,000 of 30-year decreasing term to match a mortgage. In year 1 the face amount is about $250,000; by year 20 the schedule may have reduced it to roughly $110,000 while the premium has stayed level. If the insured dies in year 20, the beneficiary receives the then-current scheduled face amount, not the original $250,000.

Key Term Features: Renewable and Convertible

Two contractual options make term far more flexible and are heavily tested.

Both features protect an insured who becomes uninsurable. With a renewable policy the premium climbs at each renewal because it reflects the insured's older attained age. With a convertible policy, conversion is usually allowed up to a stated age or date, and the new permanent premium is set at the age at conversion (some contracts allow conversion at original age for a charge).

Specialized Term Variants

• Return-of-premium (ROP) term - if the insured survives the term, the insurer refunds the premiums paid. The trade-off is a substantially higher premium than plain level term.
• Re-entry term - offers a lower premium if the insured periodically requalifies by proving continued good health; failing the re-entry underwriting moves the policy to a higher non-select premium.
• Group term - employer-provided coverage; under IRC Section 79 the cost of employer-paid group term above $50,000 of coverage is imputed taxable income to the employee.

Exam traps

1. Renewable and convertible features do not require new evidence of insurability - that is their whole point.
2. Decreasing term has a level premium even though the face amount falls.
3. ART has the lowest first-year premium but is the most expensive to hold long term because it reprices every year.
4. Group term coverage above $50,000 creates imputed income to the employee under IRC Section 79, but the first $50,000 of employer-paid group term is tax-free to the employee.

When matching a client to a term type, anchor on two questions: how long is the need, and is the dollar amount constant or shrinking? A constant need favors level term; a shrinking need such as an amortizing mortgage favors decreasing term; an uncertain or very short need favors annual renewable term with a convertibility option to keep doors open.