2.2 Term Life Insurance

Term life insurance provides pure death-benefit protection for a specified period (the term) with no cash value. If the insured dies during the term, the face amount is paid; if the insured outlives the term, coverage simply ends. Because there is no savings element, term delivers the largest death benefit per premium dollar, making it the exam's answer for clients who need maximum coverage at lowest cost.

Core Characteristics

• Temporary protection coverage for 1, 5, 10, 20, or 30 years, or to a specified age (e.g., to age 65).
• No cash value / no nonforfeiture values nothing is returned if the policy lapses or expires.
• Pure protection the entire premium funds mortality cost and expenses.
• Lower initial premium than permanent insurance for the same face amount.

The Three Types of Term

Memorize how the death benefit and premium behave in each type:

• Level term is the most common; the face amount and premium remain constant.
• Decreasing term pairs a falling death benefit with a level premium; it is matched to an amortizing debt such as a mortgage. The premium does NOT decrease the benefit does.
• Increasing term raises the face amount over time, often used inside cost-of-living or return-of-premium designs.

Renewability and Convertibility

Two provisions make term flexible and are heavily tested:

• Renewable lets the owner renew for another term without evidence of insurability, protecting an insured who has become uninsurable. The renewal premium increases because it is based on the insured's attained age.
• Convertible lets the owner exchange the term policy for a permanent policy without proving insurability. Conversion can be based on the original (issue) age, which costs more up front, or attained age. The death benefit cannot increase on conversion without new underwriting.

An Annually Renewable Term (ART) policy renews every year at the new attained-age rate the purest illustration of mortality cost rising with age.

Worked Premium-Concept Example

A 35-year-old buys a 20-year level term, $500,000 policy at $40/month. At the end of 20 years he renews for one year under the renewable provision. He is now 55, so the renewal premium reflects age 55 mortality and might jump to $300+/month even though he provided no new health evidence. The lesson: renewability guarantees insurability, not price.

Exam Traps

• Decreasing term has a level premium the benefit falls, not the premium.
• Renewal raises the premium (attained age); it does not require new underwriting.
• Term builds no cash value, so it offers no policy loans and no nonforfeiture options.
• A return-of-premium (ROP) term rider refunds premiums if the insured survives the term, raising the cost substantially still term, not permanent.

Reentry Term and the Cost of Renewability

A widely tested refinement is reentry (re-entry) term. The policy quotes two rate scales: a low select rate available if the insured periodically re-qualifies medically, and a higher ultimate rate that applies if the insured cannot re-prove good health. Reentry rewards continued insurability with cheaper premiums but punishes a decline in health with a jump to the ultimate scale. Contrast this with a plain renewable term, where renewal never requires evidence of insurability but always charges the attained-age rate.

Comparing Term to Permanent for the Exam

Worked Conversion Decision

A 45-year-old holds a 20-year level term with a convertible provision. Her health has deteriorated, making her uninsurable. She converts to whole life without new underwriting. If she converts at attained age 45, the whole life premium reflects current age and is moderate; if the contract allowed conversion at original issue age 25, the insurer would also bill the back premiums or a higher reserve adjustment. Either way she secures permanent coverage she could not otherwise buy, illustrating that the convertibility provision protects insurability, not price.

Group and Credit Term Variants

The exam also tests two niche term forms. Credit life insurance is decreasing term written to cover an outstanding loan, with the creditor as beneficiary only up to the loan balance; state law caps the amount at the indebtedness so the lender cannot profit. Group term life issued through an employer requires no individual evidence of insurability up to a guaranteed-issue limit and is the most common employee benefit; the first $50,000 of employer-paid coverage is income-tax-free to the employee under IRC Section 79.

Additional Exam Traps

• Reentry term can raise premiums to the ultimate scale; plain renewable term cannot require new evidence.
• Credit life names the creditor as beneficiary and is limited to the loan balance.
• Convertibility preserves insurability, never a lower price.