2.2 Term Life Insurance
Key Takeaways
- Term life is pure protection for a stated period with no cash value; it offers the most death benefit per premium dollar at younger ages.
- Level term keeps premium and face constant; decreasing term lowers the face (mortgage protection) while premium stays level; ART raises premium each year.
- Renewability extends coverage without evidence of insurability; convertibility exchanges term for permanent coverage without evidence of insurability.
- Conversion at original age locks the lower rate class but requires paying a premium catch-up; attained-age conversion costs more going forward.
- Term suits temporary needs only—premiums become unaffordable at older ages, risking lapse when the insured is uninsurable.
Term Life Insurance
Term life insurance provides a death benefit for a specified period (term) and builds no cash value. It is pure protection: if the insured dies during the term, the face amount is paid; if the insured outlives the term, coverage simply ends unless renewed or converted. Because there is no savings element, term offers the most death benefit per premium dollar, which is why the exam frames it as the answer when a fact pattern stresses "maximum coverage, limited budget" or "temporary need" (a mortgage, young children, a business loan).
Three structural variations control how the face amount behaves over the term:
- Level term — the death benefit stays constant for the whole term (most common). Premium is level for the term, then jumps.
- Decreasing term — the face amount declines on a schedule toward zero, often matched to a mortgage balance. Premium stays level. Frequently sold as mortgage protection.
- Increasing term — the face amount rises over time (often used inside return-of-premium or COLA riders).
Renewability and Convertibility
Two contractual options make term flexible and are heavily tested:
- Renewable term lets the owner renew for another term without proof of insurability (no new medical exam), but at the higher attained-age premium. Because only worse-than-average risks tend to renew, the insurer charges progressively more — an expression of adverse selection.
- Convertible term lets the owner convert to a permanent policy without evidence of insurability. Conversion may be priced at the insured's attained age (current age, higher premium) or original age (the age at the term policy's issue, requiring a lump-sum catch-up of the premium difference).
Exam trap: Both options waive medical underwriting, not the premium increase. "Without proof of insurability" does NOT mean "at the same price."
Special Term Forms and Annual Renewable Term
| Form | Key feature |
|---|---|
| Annual Renewable Term (ART / YRT) | One-year term, renewable each year at the new attained-age rate; lowest first-year cost, steeply rising |
| Level Term (10/20/30-year) | Premium and face level for the full term, then renews at much higher rates |
| Return of Premium (ROP) term | Refunds premiums paid if the insured survives the term; higher premium |
| Reentry term | Lower "select" rates if the insured re-qualifies medically at renewal; higher rates if not |
Worked comparison: A healthy 35-year-old might pay roughly $25/month for $500,000 of 20-year level term but only a few dollars in year one for ART — yet ART's premium climbs every year and eventually far exceeds level term. The exam tests this trade-off: ART minimizes early cost; level term stabilizes cost over a planning horizon.
When Term Is the Right Recommendation
Suitability questions reward matching term to temporary, large, budget-constrained needs. Classic correct-answer scenarios include: a young family needing high coverage during child-rearing years; a borrower protecting a mortgage or business loan; or a key-person need expected to end at the executive's retirement. Term is generally the wrong answer when the fact pattern stresses permanent needs (estate liquidity, lifelong dependent, cash accumulation) — those point to whole life or universal life.
A final tested point: term has no nonforfeiture values because it accumulates no cash value, so there are no policy loans, no cash surrender value, and no reduced paid-up or extended-term options. If a question asks which policy lets the owner borrow against cash value, term is always the distractor to eliminate.
Which term life feature allows the policyowner to switch to a permanent policy WITHOUT a new medical exam?
A borrower wants coverage that decreases as the mortgage balance falls while keeping a level premium. Which term form fits best?
Worked Premium-Pattern Comparison
To see why term costs less than permanent insurance, compare three buyers, all age 35 seeking $500,000:
| Choice | Approx. monthly cost (illustrative) | Cash value | After 20 years |
|---|---|---|---|
| 20-year level term | Lowest level cost | None | Coverage ends or renews at high rate |
| Annual renewable term | Cheapest year one, rising | None | Premium far exceeds level term |
| Whole life | Highest | Builds | Permanent, paid-up potential |
Term wins on current cost per dollar of death benefit because none of the premium funds a savings reserve. The trade-off is impermanence: when the term ends, the healthy insured can renew (costly) or convert (to permanent), while an insured who has become uninsurable can still renew or convert without new evidence of insurability — the central value of the renewable and convertible provisions. This budget-versus-permanence tension is exactly what suitability questions test.
Group Term and Credit Term Forms
Term insurance also dominates two non-individual markets the exam expects you to recognize. Group term life is the most common employee benefit form: a master contract covers eligible employees, often with employer-paid coverage up to a multiple of salary, and the first $50,000 of employer-paid group term is income-tax-free to the employee under IRC Section 79 (coverage above $50,000 creates imputed taxable income).
Credit life is decreasing term sold to cover a loan balance, with the creditor as beneficiary limited to the outstanding debt. Both reinforce the core term traits — pure protection, no cash value, temporary duration matched to a need — and both appear in suitability and taxation questions on the national portion.